00:00Secondary deals for private assets surging to a record $121 billion in the first half of this year.
00:06According to Evercore, that's been driven by fund managers seeking to hold on to single-quote trophy assets longer.
00:12You can see GP-led transactions have not only surged, but also overtaken LP-led transactions in the first half.
00:19Nigel Dawn is global head of the private capital advisory group at Evercore,
00:23and he joins us now to take a look at the big picture.
00:26Nigel, great to have you here.
00:27Terrific to be here today. Good to meet you.
00:29That's a big number for the first half, for the full year. Is that number going to be even bigger?
00:33I mean, our view for the full year, we could be $250 billion, maybe $260 billion,
00:39assuming there's no macro global issues coming up.
00:43Well, let's talk about the issues that actually sort of led to this surge.
00:46I mean, there's been a lot of talk about the growth of the secondary market.
00:50To go from, to get to $120 in six months and then presumably outpace that almost in the next six
00:57months,
00:58that seems to suggest that there's a lot more going on than just maybe some sort of short-term cyclical
01:02development.
01:03I think so. I mean, we see it as a structural change in the market.
01:07The secondary market is sort of core market infrastructure right now.
01:11Well, when I started off 27 years ago in this market, it was a tiny market and sort of ignored.
01:17Now, I think like our clients, the largest LPs in the world and GPs see it as a way to
01:24get liquidity
01:25in a time where private equity portfolios are really not producing the distributions that limited partners expect.
01:32Well, when we think about private equity and think about the conventional exits,
01:37and there's been so much talk about how those conventional exits paths have been,
01:41if not shut down, certainly hampered to some degree.
01:44If we do start to see a renormalization of those conventional exits,
01:48what does that mean for the secondary market and these sort of GP-led investments?
01:54Yeah, it's a great question.
01:56Our view in continuation vehicles, it tends to be the highest conviction asset the GP owns.
02:01So it's the one they would like to keep if they could.
02:04The next leg of growth they need to finance,
02:07so continuation funds tend to be used for them to have the next leg of growth.
02:11But it's their best assets.
02:13So our view is that this continues to grow and perhaps it even accelerates.
02:18Well, when we get to, say, I don't know, let's say we have this conversation three or four years from
02:23now,
02:24is it going to be, is market still going to be that large?
02:27The secondary market is going to be larger?
02:29Our view is it's a structural shift in the market.
02:31And the secondary market is still only about 2% of the global assets on the market.
02:37It's tiny.
02:37So there's a lot of room for growth.
02:40Also, our view is when institutional fundraising comes back and it's being subdued,
02:46a lot of that goes into the secondary market.
02:49So we feel there's terrific tailwinds in this market.
02:52Well, I'm curious about this idea of trophy assets and the high conviction assets.
02:57I mean, I understand the logic of why that would sort of be part of this process.
03:01But I would also assume, given the holding period that we've seen on some of these assets,
03:06that if they are that pristine or that valuable, why not try to find a more conventional exit?
03:13I think typically it's an asset that the GP can't recreate.
03:17And their view is that there's a lot more growth going forward.
03:21It may need more capital to finance that growth.
03:24So typically in a continuation fund, there's growth capital as well for the next leg of growth.
03:30I am curious, though, do you have any sense, I mean, just looking through the report you guys put out,
03:34of sort of what proportion of any sort of proposed single asset continuation deals
03:40fail to actually attract enough capital?
03:42Yeah.
03:43Well, Evercore, we lead the market.
03:44Obviously, we're about a 50% market share.
03:46We're really fortunate we get to work with the best GPs on the best assets.
03:49So our closure rate is 90%.
03:54So our sense is the market is somewhat lower, but I don't exactly know what the flows rate is.
03:59How does the continuation funds and their performance compare with traditional buyout funds,
04:06particularly when I look at some of the more recent vintages and I'm looking at DPI out of it?
04:11I mean, some of those numbers in your own report are relatively low.
04:14Yeah.
04:15I think that the returns are still being crystallized.
04:18Our expectation is they'll be about the same as a traditional buyout,
04:23but perhaps with less volatility around the expected return of the individual assets.
04:28But just to be clear here, when you say they haven't crystallized,
04:31so, I mean, these aren't actually sort of realized returns?
04:34It's more just kind of mark-to-market?
04:35Yeah, I think that the continuation funds that were done, you know, 2018, 19, 20,
04:41they're becoming crystallized right now.
04:43It's the funds since then.
04:45And the typical holding period of one of these continue is three to five years.
04:49Now we're starting to see the liquidity come through from them.
04:52When you talk about this idea of this providing liquidity,
04:56there was a lot of talk about a couple years ago about the dry powder that a lot of these
05:00funds are sitting on.
05:01And we know that dry powder has gone down somewhat here.
05:03Is this sort of making up for that?
05:05Our sense is that in the secondary market, there's about one year of dry powder.
05:09So there's not enough to be abundant,
05:13but there's enough to have a competitive market for both buyers and sellers in this market.
05:17And the second half of the year, we expect another $150 billion to be raised by the secondary market.
05:22So our sense is there is enough capital available.
05:25There's enough capital available.
05:26Are there enough assets available, high-quality assets?
05:28Our sense is there are plenty of high-quality assets.
05:31If anything, the constraint right now is capital formation.
05:34So when we have more capital, we think that the market grows even further.
05:39That's our expectation.
05:41I do have to ask you specifically about what's going on in the software space,
05:45because I'm looking at some of the numbers there,
05:47and we've seen that the continuation fund volume for software-specific deals is down significantly here.
05:54Can you give me any sense as to what the reticence is right now,
05:57whether people are just completely on the sidelines,
06:00or are they willing, if the seller is willing, to take whatever discount that they can get?
06:06The market's coming back.
06:07Our sense is that the second half of the year is going to be busier.
06:10The reason the investors have had time to analyze which business models are likely to be durable,
06:17which ones are going to be challenged.
06:19So when we look at our pipeline, it's pretty healthy in terms of software.
06:23So we're feeling pretty – the market is much more selective, though.
06:26So I think that's fair to say.
06:27Much more selective.
06:28I mean, when you look at software deals, I mean, are there – is there sort of a specific sort
06:32of model,
06:33software model, if you will?
06:34There's been a lot made of sort of seat-based pricing and how that could become,
06:38if not obsolete, certainly minimized because of the rise of AI and tokenization.
06:43Are there certain types of software models that maybe are just less attractive,
06:46people are staying away from?
06:47You know, certainly horizontal models, I think, where you could, you know,
06:52in a sense that there could be some real disruption.
06:54I think the market's still trying to figure out what happens.
06:56Certainly vertical models, this is a lot more interesting.
06:59You know, durable models, where there's a sense that AI will actually be an enabler,
07:03not a disruptor.
07:04Are you finding, specifically with regards to the appetite right now,
07:09from – on the GP side, obviously we know, understand their perspective here,
07:14but with regards to further transactions involving other parties, is that appetite still there?
07:20What we certainly see on the GP side, there is certainly a lot of appetite.
07:24I think the analysis around these situations and the diligence is done,
07:28it's probably a little deeper than it used to be.
07:30It's not an appetite problem, though.
07:32Okay.
07:32But so right now, when you look at pricing and you look at where we are right now in the
07:36PE space,
07:37are we getting back overall to something that would, I guess, would be called normal?
07:43And I understand that this is a structural story and this becomes part of the new normal.
07:46But when we talk about price discovery, supply-demand, both in terms of investor appetite,
07:53but also that mismatch or match-up between capital and assets, is that getting back to normal?
07:57We think it is.
07:59I mean, if we look at the buyout market specifically for secondaries, right,
08:02that 90% of the GP's last valuation is a good price in the secondary market,
08:08and that's where sellers have been selling.
08:09So we feel pretty good about that.
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