What NAV Is Really Signalling in Private Markets | Alex Branton, Nodem Capital

Speaker A: Private markets are uh, built for illiquidity. That's how they've been designed. You commit your capital, it's invested over time and you get it back when the manager is good and ready. And that's been a source of so much value. But the problem with that is that the industry would struggle to scale if that illiquidity endured. And so instead we've seen a whole ecosystem of liquidity solutions grow. So there's secondaries of course, but there's preferred equity, there's nav lending, there's continuation vehicles. And my guest today is in a perfect position to help us navigate this complex ecosystem. He is been an advisor to institutional LPs, he's been on the GP side, he's worked in public markets. And Alexander Branton is a founder of Nodem Capital, which focuses on nav lending. Nav lending. But our conversation today is going to be a lot broader than that. We're going to look at what the options are that are available with regards to liquidity tools, who should use them, why they use them, what are the benefits, what are the risks, who really benefits. And so Alex, welcome to Fun Shack. I'd like you to start by just outlining your bio for us because I think it's quite relevant to the conversation that we're going to have.

Speaker B: Cool. Thanks Ross. Thanks for having me. So look, I started my career at Cambridge Associates, which is somewhat atypical start for a nav lender, but actually directly relevant. So I was advising family offices, sovereign institutions, um, on their private market allocations, their broad allocations. And so you had access to the brightest minds from very early on. Um, as you're moving billions every day at Cambridge, you also had the fortunate opportunity to work with very, very long duration investors endowments that really didn't need capital early so you could really go big on the private allocations. So started there, great learning ground to really understand all asset classes really. Um, and the way that LPs think both in good and bad, bad times. I'd say the only caveat being was when I was there post financial crisis, you' the kind of up and to the right private equity allocation, 0% interest rates. Um, and so I didn't really see uh, a real liquidity crisis from the LP perspective when I was there.

Speaker A: Can I just ask, how much did the sophistication vary among those clients when you're at Cambridge?

Speaker B: It ranged from people that really had internal investment teams and that could do 95% of it themselves but wanted kind of great ideas on the private side or some aspect of it outsourced or all the way to people that had completely outsourced the entire um, on a discretionary basis. So you really had um, um, all types. But I'd say probably minimum 100, $200 million of assets and many in the multiple billions to give you kind of an idea of it. And then so following that, after a stint in public markets, as you mentioned, um, I really found my calling in kind of direct private equity as a gp. So working for Sturgeon Capital, we managed money for Chevron and invested it into uh, places like Central Asia, South Asia, Eastern Europe, mena. And that's where you really felt from at the coalface, that kind of illiquidity in a real kind of aggressive way and how to navigate that. So by that point you really kind of had an understanding of how LPs think about liquidity, how GPS think about it, the difference between developed emerging markets. And I think that kind of grounding gave me an understanding of where there may be a gap in the opportunity and we can go into how private markets have developed and the need for it. But I saw the gap in the market for a certain type of nav lender, uh, to private markets as ah, an additional tool that people could use alongside all the others we'll discuss.

Speaker A: So to try and pass this ecosystem of liquidity tools, maybe we should break it down into the secondaries world and then the toolkit beyond secondaries. So could you speak to the secondaries and outline what are the tools available there and who might use them and why?

Speaker B: Yeah, so when people talk about secondaries, they're generally talking about this $250 billion of capital that's divided broadly into LP led and GP led secondaries. And so people often think on the LP side that just means an LP selling their stake to someone else, which is in effect what it is. That's one of them. Another type of it would be selling a portfolio of LP interests to somebody. It can also be levering an LP book in order to generate liquidity. It could be selling a pool of LP stakes into a bankruptcy remote spv which then securitizes. So you sell the top tranche, goes to, it gets rated, um, then you've got a mez and an equity tranche. So, and that'd be called a collateralized fund obligation. And so that market, um, I'd say is broadly divided into kind of subscale LP stakes where you have a few boutique players that might buy them. Um, but it's extremely Hard to sell smaller LP stakes in the current market and then you've got the vast majority of that market. I think over 50% of the capital is in about 10 firms that are buying huge portfolios of LP stakes. And so that's how I'd characterize the LP side. On the GP side you have um, I know you've discussed this before but continuation vehicles, you've got single asset and multi asset and that split kind of roughly 50, 50. The market for single assets is growing significantly because you get also non traditional secondary players that might participate and be able to underwrite direct companies um, prefer those multi assets. There's a tendency sometimes to bundle in weaker ass um, in with the better ones. So actually interestingly you find the single asset um, GP led continuation funds being growing faster at the moment. You then have strip sales. You're selling a strip of the portfolio to ah, an spv, um, for someone else to manage a strip meaning part a strip. So a little bit of each company in the portfolio um, gets essentially shifted into a separate fund managed, sold to someone else who manages it.

Speaker A: So not a certain number of companies but most of the companies and a proportion of them.

Speaker B: Exactly most of them. And then some people prefer that given the diversification. And then you can have everything from a fund recapitalization so a whole new fund is created and um, recapitalized and everything shifted there. Um, and then again a fund can also take a NAV loan, um, which would be literally a loan against the fund's underlying assets. Is that a secondary NAV lending? I see it sitting on a spectrum from effectively being straight debt all the way up to I'd call structured secondary. And by, and so by a NAV loan we can go into what that is, let's call it a 10 20% LTV loan. So real debt like risk, so you can argue if it's in the secondary toolkit, but it's certainly kind of debt like in nature. The higher you go on the ltv the more equity risk that person that's kind of effectively buying that position is.

Speaker A: So loan to value.

Speaker B: The loan to value so goes all the way up to I'm going to buy an LP stake or a uh, company from you at 60% of NAV, I'll give you that today. And then when the next proceeds are received I want to receive a preferred return and then we'll split proceeds above it. So it's in a classic form, NAV lending is really a loan against it. But the higher the LTV you go Effectively what you're doing is a secondary transaction and letting the market decide who gets what. So if you have $100 million fund stake, for example, and we go back and forth and I'm saying it's worth 70, you think it's worth 95 or even more in the future. What we can say is, look, we don't need to have that argument today. I'll give you 60, 60, um, today. And if it performs as well as you think it is, we'll split the profits in the future in such a way that effectively the market has decided what that price is.

Speaker A: Sorry, the 60 and 95, they're discounts to the nav. Is that we.

Speaker B: Exactly.

Speaker A: Sorry.

Speaker B: Yeah, yeah, exactly. So I think it's worth, again making it up, but 70 cents on the dollar. You think it's worth 90 cents on the dollar. I say I'll give you 60 and lets the market, we'll split the profits. So let the market decide what it's worth. It's uh, a way of getting around quite a high friction process in secondary markets and I'd say.

Speaker A: So it's almost like rollover equity.

Speaker B: Yeah, exactly. Yeah, exactly like that. And so that's how I categorize the main secondary types.

Speaker A: Okay. There's already quite a lot to encompass and what I'd maybe like to try and get to is a way of just simply categorizing these. Um, so you mentioned structured secondaries, so could you maybe define that in a very simple way and tell me where what you've already discussed fits in?

Speaker B: Yeah, so structured secondaries is I would call quasi, quasi debt. And so really the purpose of it is where a market price really can't be kind of, we can't agree the bid ask spread is too, is too wide essentially, but you need liquidity and I'd like access to your company, your fund or whatever it is. And so I will, we will agree on an amount up front that I will give you. And then, and so the way it works is if I, if I, if I go through an example, you've got $100 million fund stake, I say I'm going to give you $60 million today. And then what's going to happen is um, when that fund, the next distributions from that fund stake come, I need to be paid back as a structured secondary provider. That's my 60 million needs to be paid back first. Then there needs to be a preferred return of usually kind of single digit type return. When that's cleared. Sometimes you might get everything above that or It'll be you get 90%, I get 10 that way. Um, it's essentially a downside protected mez like investment from my perspective and from your perspective, you've um, got the capital today in many ways. You can also continue to benefit from the growth of that stake. So if you really believe in it, you think, look, I need liquidity today. It's worth 100 million. It could be worth 2,300 million in five years. It's much more effective to take 60 million today. Um, reinvest that elsewhere. Yes, there's a preferred return that kind of is associated with that. But ultimately you'll be spitting profits from 100 to 300 million of that future growth as well. So a way of getting capital today and holding on to some of your, your growth. But what I would say and what I found is that I thought I would do more of those types of transactions. What I find is that in reality people with the absolute very best assets prefer to take a NAV loan because it's cheaper. Effectively you can achieve something very similar. So you come to me, you've got um, $100 million, but actually you need $30 million right now to do that strategic acquisition or to return to your LPs some capital, whatever it might be, you can come to me. It's a much lower. Because the LTV is lower. It's a much cheaper source of capital. The higher your LTV as someone that's kind of getting capital, the more expensive

Speaker A: it is or the, or the weaker

Speaker B: the asset or the weaker the asset. But ultimately what's happening is that person providing you the capital, something that was debt as a nav loan at 30% or lower is becoming an equity investment as they go higher and higher on the ltv. Yes, it's a downside protected one. But ultimately it's, you know, you know, 100% LTV loan is just an equity transaction. A 10% one is definitely debt. Something in the middle. It's kind of some version of it. Um, I'd say it's, it's ah, so it's a, it's a growing area I would say. And really the purpose of it is to structured secondaries is to get around pricing issues essentially, you know, um, um, and letting the market decide by profit splits.

Speaker A: Structured secondaries then are something like preferred equity, preferred equity secondaries sale. Yeah. And NAV lending is just a, literally, it's just more like a, just a credit solution where you're not giving away any rolled over equity. Yeah, but you're solving a Similar solution. It's just that nav lending is better for high quality assets with a lower ltv and, and vice versa with structured secondaries.

Speaker B: Exactly, exactly.

Speaker A: And, and what, what kind of share of the market do you think one and other have right now?

Speaker B: The use of nav facilities and structured. I mean these are uh, tools that have emerged in a major way, I'd say in the last five years. So they're very probably the newest and most kind of innovative side of the market. I mean if I take a step back and go like, how did this whole, the whole market develop? You know, you started in 1978 with um, Dayton Carr buying Thomas Watson, the son of the founder of IBM's LP stakes, because he needed to go and become an ambassador to the USSR. So that's the first documented LP stake, um, transaction. And really it was all LP led until really 2010 when the GP led kind of started coming in. And actually direct secondaries, not really until 2018, 2019. Even then at the top of the market it was tough to get a good transaction. So really direct secondaries came in direct secondaries. Meaning, meaning kind of a firm that is just kind of specialized in buying direct stakes, um, from, from GPS as opposed to the GP themselves or, or an LP kind of managing that in their portfolio. And then I'd say the latest development is kind of nav lending and, and then structured secondaries at which I, I kind of do see them at different ends of the spectrum of similar thing as, as we discussed prior to I would say nav lending, the way it's used has changed kind of significantly from up until Covid. They were used more for DPI acceleration. Imagine you have a fund that's $500 million. You want to keep hold of those assets but return m some capital. You basically do a dividend recap at the fund level. So you have a $500 million fund, you take $100 million of debt essentially to give back to your LPs, which has now become a very controversial way of using. We can go into why, but is. And so what ended up happening is the market went 90%, that being a use case, to about now 95% being used for accretive investments during the fund's life. And it's about 5% or less is used for that purpose.

Speaker A: Right. So the um, structure still exists, but the reasons behind it have completely flipped.

Speaker B: Absolutely. So nav lending, I mean taking a step back is I guess the value of all the equity stakes in your portfolio net any debt. And so if you're a $500 million NAV fund. What you could effectively do is borrow against that fund to distribute back and that's another use of it. And then maybe it's a good time to say how NAV loans yet are used. So that's one DPI acceleration. And now more often it's called an offensive use of them. Um, which is year six, you've got that $500 million fund. It's, you're fully drawn. Suddenly you get an opportunity yourself as a fund manager to buy a discounted secondary in your top company. Either you go to your LPs and ask for more money from a co investment vehicle, or you could raise it in another way, or you could say, you know what, in 40 days we can raise, whatever it might be, $50 million of capital through a NAV loan from, from me, um, and we will provide that. And then that becomes basically a leverage on the fund. Um, and it can be used that way. Um, but I guess the confusion often comes from the many different ways a NAV loan can be used. It can be used basically in lieu of a secondary. It can be used potentially badly, uh, in lieu of a proper exit because it's kind of delaying. We don't think we can sell these assets. So let's just get some debt against it, uh, to give it back, which is why there's a controversy. And then Pew can use it, Family Office can use it at their, their portfolio level. An LP could use it against a single stake, an LP stake. Wherever there is value, wherever there is nav, you can get a loan against it. Um, and that's, that's NAV lending. But the use, I think the original question is where, you know, how recent and where does it fit in? I say it's very recent to the point where there's still no universally adopted understanding of how to use facilities like that. And so there's kind of, among the LP community, there's still not a consensus as to how it's being used. Someone like an ilpa, for example, um, which sets a lot of the standards for private equity funds, came out with a paper a couple of years ago. But really, still there's a big split in terms of whether they're a good idea or not, whether how they should be used for money out, money in, um, and this is very common with any financial innovation, whether it be secondaries, whether it be subline credits, whatever it is takes time. And we're in that journey right now.

Speaker A: Well, let's talk about some of that controversy but first, let me see if I have fully understood. So you likened them. And I think it's a good analogy to dividend recaps, which most of our listeners will be familiar with at a portfolio company level. They're like dividend recaps at a fund level. But the confusion is not in the structure, which is relatively simple, but because there's so many motivations for using it. As with the dividend recap, I suppose you can get one to distribute, to pay yourself back, or you can get one to invest in the business R and D or bolt ons, and it's a similar type of situation. So you've got a relatively simple, uh, conceptual structure, but there's many different uses. And also you say some controversy around, uh, the approach. Could you give us a little bit more detail? What's the big deal?

Speaker B: Yeah, so the controversy is that if I give, um, a picture of quickly how the landscapes developed and then where there may be portfolio and bad use cases. So the private equity landscape has grown, you know, four times over the last, um, 13 years of low interest rates, effectively. And so what you could argue you're left with, if you have a, uh, 2018, 2019 vintages are companies you bought using 60% of the investment amount being cheap capital, effectively at, uh, valuations that are too high. But you know, you've got an elevated nav and you think, you're not quite sure that you could. This is the bad use case that people are trying to avoid, to be clear, which is a minority of use cases because also nav lenders are very discerning. So even if someone wants it, they're not going to get it if it's a bad portfolio generally. And so you're there with an overvalued portfolio that you can't sell because the bid ask spread is way off. And so your LPs are asking you for some liquidity. You're still holding marks at pretty elevated levels. You go to a nav lender and say, you know, let's Give these guys 1 x DPI back by taking a loan in the knowledge that that portfolio isn't worth quite as much as you thought. It's also the messaging, the optics are not great. Basically, you know, taking loan against, if it's so great, why not just go and sell those things in the market? And so that perception, that misalignment potentially of interest, um, you're also putting structurally someone else senior in the fund above, above someone else to do that. So the nav lender becomes senior to those LPs generally, um, from the next distribution.

Speaker A: So do the LPs need to sign

Speaker B: off on it, therefore, so newer funds, it's built into the fund document. So the LPA that govern it is usually built in outside of that the ILPA guidelines. And this is followed effectively. You have to consult the elpac, which is a consultative body of the fund, to tell them that you're using it for DPI out. Um, if it's money in use case, it's maybe less, um, less considered. But anything where you're taking money out of a fund that might not be worth quite as much as people say using a loan to do so, you have to really explain yourself. Um, and again, it's a real minority of UM funds. But you mentioned the dividend recap point. It's a good one because a lot of distributions are funded at the underlying level through dividend recaps, which by the way, encumber the underlying companies. You know, a NAV loan at the fund level isn't putting any more stress on your underlying companies, uh, if that makes sense. But if you do a dividend recap at the underlying level, you know, you're crushing them. But that's, that's more. So that's more accepted than doing it. Um, and so you kind of. There's a weird, some weird contradiction still in the market, but I'd say everyone's trying to come to a consensus and you know, generally speaking, arguing that you can take capital at 7%, say from me, to make an investment that could generate 20% plus in your winner is an easier sell. You go, we can get this cheaper capital through the nav loan structured by really great. So backed by a really great fund. And look, it's actually much cheaper and accretive to take it at 7%, invest it at 18%. That's great for you as the LP. Whereas if you're taking it out, um, it's a little bit. Okay, why are you doing, why you're doing that? The optics aren't as great, the alignment isn't as great. Um, you can argue about the pros and cons, but that's how I, I'd say. But there's certainly no consensus around these being the market's very split. Although buyout now is becoming much more commonplace to use these.

Speaker A: Um, so they, they should be less controversial, let's say, than dividend recaps at the portfolio company because you're not putting pressure on the individual company. And there are also market mechanisms that act as kind of, uh, you know, guardrails let's say which are the nav lender uh, won't agree to it if it looks suspicious. Yeah. And there's the ELPAC sign off. Yeah, they're the main ones.

Speaker B: I think so. I think often the nav lenders are not given enough credit. I think that you know, surely these are a bunch of terrible portfolios that someone is just trying to get any money out of. And that assumes that the nav, you know, the nav lenders are just wide like you know, wildly kind of giving out capital which couldn't be more, uh, kind of less true. You have very conservative LTVs for a start really probably somewhere about 10 to 15 is probably normal for a nav facility. But also the bar is extremely high in order to get a facility like this. But you absolutely get. Every month I will get 30 deals that I instantly. You can see that this is not a good use case for nav lending. That's part of anyone's process. We also have a product we're offering. Our uh, RLP is a high quality, low loss debt like product. Um and so we're very discerning with who we uh, give capital to. But yeah, if it was widely just given out to anyone you would have issues.

Speaker A: You can understand people's skepticism because underwriting standards can fall. The credit markets are strange like that. Banks can for example get ahead of themselves. Why are standards as you say relatively high in nav lending? Who are the players here other than yourselves obviously.

Speaker B: So you have, that's a really good question. So you have the banks um, who will look to do very low LTV transactions against kind of cash flowing portfolios. They know that they can kind of get paid back often from the dividends or distributions that are coming in and not relying on say an exit. Um, the banks often provide um, other nav lenders some back leverage also on their, their own. We can get, we can go into it but banks are there with very straight down fairway. They might try and provide nav lending as a kind of loss leader sometimes to get capital, core facilities or other services at the bank as more of a holistic thing. So they're working with very very large investors, cash flowing portfolios straight down the fairway. And that's because of the way cash needs to be provisioned for a bank. These are pretty expensive in the sense that they have to set cash aside as a bank in order to provide a nav loan. But there's obviously juicy fees that can be generated right through ipoing of the underlying funds through subline facilities, through everything else. So a bank may go out of their way to do a NAV facility even though it's structurally a little different. You then have the non bank players of which the largest is someone like a 17 capital who are raising sort of 10 plus billion dollar funds at this point, providing NAV facilities and prep facilities to huge buyout funds in the, you know, the hundreds of millions. And then no dem kind of fits the gap in the middle I'd say for the sort of 25 to 100 million dollar lend to the mid sized private equity firm, the mid sized family office, um, people that are kind of somewhat ignored. And I would say that there's a huge gap in the market also for sub, um, twenty million dollar type facilities because the big guys have become too big. It's absolutely not worth it, not worth it for a bank, not worth it for anyone. So longer term that's uh, a part of the market we'll be focusing on as well, the sort of 10 to 20 million dollars facility. So that looks like someone high net worth individual with a $50 million portfolio that wants some financing against that portfolio of super high quality LP stakes. There is no one doing that at the market.

Speaker A: So I, no one doing that in

Speaker B: Europe or what are we talking globally like very, very. There might be a couple of um, players that may look at it but ultimately it's just deemed too small. And the reason for that is the way that NAV lending is funded is often funded with insurance capital. It's funded through back leverage, it's funded through um, various different kind of clever sources which structurally is very large. And so it lends itself um, just to these kind of scaled players who can have cheaper cost of capital effectively. And so I would say that we sit, we play in 20 to $100 million lend. There's a huge gap. I see great portfolios in the sort of 10 to 20 million dollars lend. Um, and that's how I'd broadly classify it. We try to specialize in family offices as well, I'd say. Yeah.

Speaker A: Did you say that the banks sometimes lend to NAV lenders at the fund level? Wouldn't that make it leverage on leverage on leverage?

Speaker B: Well, the way it would work, yeah, basically, yes. Um, but it's again taking a step back in terms of how conservative this is. You're talking about for example a fund that may have 30 NAV loans in it, each of which somewhere between 5% and let's say 20%. So there's multiple Very, very low LTV loans in there and you've got portfolios that have 10 control positions in pretty high quality companies. So to put into perspective for something to go wrong for a nav lender you, you need to have got many kind of the portfolio needs to drop, you know, 70 plus percent in value across, you know, universally with a correlation of one for you to lose money. So you've built up a diversified portfolio there, you have your LPs in your fund and then you go, you know what? Actually what we'll do is we'll get some additional leverage, very minor leverage from the bank, um, that acts as kind of um, is minorly senior but again it's still within that everything has to fall 70% for anyone to get hit. So it's all very conservative. I think if you started seeing leverage on leverage and everything was 50 to 60% or whatever it might be, um, LTVs, yeah, you've got a problem. But it's very conservative um, at the moment in terms of the amount given.

Speaker A: So I feel more informed and I hope our audience does with regards to the liquidity solutions now. But I'm not sure. I feel like uh, the solutions relatively well organized in my mind. So the hypothesis that I had was that there are secondaries and there's stuff beyond secondaries and I thought the secondaries were uh, a way of getting liquidity where there's a transaction. And beyond secondaries would be a way of getting liquidity where there's no transaction. But it sounds a little bit more like there's not a clear line, there's a spectrum.

Speaker B: Yeah, I would agree. I mean if I give you a very simple example. So imagine you have your, an investor, let's say you're um, a family office with a hundred million dollar portfolio that's growing um, pretty strongly. So you may be in that you want to sell that, you may be in a situation where you could sell that for 100 to 110 um, cents on the dollar right now. And that would make sense. Go to the secondary markets, um, get your liquidity, reinvest it somewhere else if you've got a $100 million portfolio. This is in the context by the way, that in venture 80% of the liquidity is in 20 names. And something is not vastly dissimilar in private equity as well. It's very skewed to kind of very few names. So when you see pricing data for example, what people are really talking about is revolut. They're talking about SpaceX or whatever it is if you're holding a very solid European company, that subscale and minority stake, there's almost no liquidity in that to the point where if You've got your $100 million portfolio and it's full of fantastic European mid market, maybe a few Venturi growth type positions, the bid on that might be 50 to 60 cents on the dollar you might be getting for a portfolio like that if you're lucky, uh, and after a long arduous process of trying to get that capital and that is a portfolio that is growing. And so let's say that you have a portfolio you can sell right now at a nav, that's healthy, fantastic, go for it. Use the secondary markets. But sometimes you just want liquidity quickly. You like your portfolio or you just completely disagree with the pricing. That's where you might want to look. Um, look to a NAV loan, a structured secondary look for these other, other um, pieces. But what I would say is generally the smaller you go in the secondaries, the more inefficient the market is. It is wildly skewed to very, very large um, portfolios. And also let's remember that a lot of the secondary managers that we discussed earlier, they themselves have taken on some leverage in a minor way as well, which is a form of nav loans. So it all kind of melds together. But um, what's ended up happening is that you have a four times increase in private markets and you have a disproportionately small amount of tools that are available alongside that. And it's kind of a natural, a natural response to it. And you have 18,000 backlog in private equity, 18,000 companies that are in inventory that'll take eight years to clear 20, 19 vintages. On the private equity side, the median DPI is about 0.5 now, VC it's much lower. And so in order to maintain liquidity in the market, one you're going to, you know, you are going to get structurally maybe healthily slower commitments to funds. But you are going to need to see a big uptick in secondaries of all sorts of innovation, um, of all sorts. And what you are seeing in terms of an injection of liquidity are these kind of semi liquid evergreen funds that what they're trying to do essentially is to funnel a new form of capital, wealth capital into private markets to inject a little bit more liquidity as the institutional investors kind of start to uh, slow down in many ways and say, well, hold your horses until we actually get some DPI where we're holding off doing anything else. But there is a lot of development that's required now ahead of that huge 15 year upswing and up and to the right increase in private equity, um, largely driven by the low interest rates.

Speaker A: Can we come back to the evergreens? Because I want to talk about that in more detail. So you mentioned the pricing being inefficient. So first of all we're sitting here in mid-2026. There are lots of these unicorns, these billion dollar companies that are trading in private. Do you have an idea of the pricing there? And also does this 60% discount in the smaller market, is that something that moves or is that something that's relatively static?

Speaker B: The first thing to say is yeah, especially talking about venture, uh, when anyone quotes a secondary discount, they're talking about 20 names effectively, whether it's kind of LP stakes or they're talking about companies, which is kind of largely irrelevant for the broader market frankly. Um, so if you're in One of those 20 names, the market is pretty efficient. There are platforms, you might not get any access to the underlying data as to what's going on, but you can certainly buy and sell certain companies, um, during those platforms with pretty high efficiency. Soon as you fall below that you've probably got another 30 names where you're looking at 80 cents on the dollar type positions really based on depending on how conservative the NAV or the pricing is, but generally 80% below that. It is completely inefficient and all over the place. But what I would say is that the funds generally would rather hold onto those positions forever than acknowledge a price in the secondary market. That price needs to be attractive enough on the secondary market that someone buys a position with a margin of safety. And so what ends up happening is a lot of the secondaries, the direct secondaries, get bought from employees that are less, slightly less price sensitive. They've worked on a unicorn for 15 years. Like I want to buy a house, I'll sell that. Like, oh, 60 cents on the dollar. Okay, I'll do it. And it's done that way. Um, and so you really get that divide in terms of it's skewed towards the largest names. And on the other side, the liquidity in the LP side is largely huge portfolios of many, many, sometimes in the hundreds. LP stakes that get hoovered up by color capital or someone like this.

Speaker A: The other question I had on this was obviously nav, uh, the manager's mark is the reference point in all this. But how robust is this and what do you, let's say you, as a nav lender, uh, you must take a pretty sharp view of this. What's the best practice in terms of analyzing it?

Speaker B: Again, this is where it's kind of useful. Having been on the LP side and the GP side, how you think that things are created on the LP side often is kind of different to the reality. The reality is a nav is essentially the GP themselves coming up with comparable multiples. Um, effectively they'll run some analysis, um, as well. And there's generally some pretty robust standards that go into it. But at the same time, if it, you know, it can for some people suit them to have, oh, we're in, you know, we're holding something at the last funding round. Well, that last funding round was in 2021. So, you know, probably you should, you know, there's no obligation necessarily to kind of mark that down. The auditor sort of takes the input of the GP as to what they think that it's worth. Yes, they sense, check it. Um, but ultimately there's a lot of GP discretion as to what goes into a navigation. And so the best GPS are all pretty rigorous on their navs. And that's why there's a certain trust level with certain types of gps where you go, you know what, this is kind of 70% of the way, 80% of the way there. Yes, we need to kick the tires. What I look at, and this is where there's a fundamental mismatch is between real transactions that have happened, what did they actually sell at, and then what is held in the, um, in the, in the funds still. And what you find is that live transactions, one, they tend to be pretty skewed and relatively few names, so there's little, sometimes you can take from it. But for sort of the median transaction, they tend to be at multiples pretty significantly below the multiples that the NAV is being held at in the fund. So those unexited businesses are at a completely different whack. So the easiest way to do it is, okay, I've seen you've got a portfolio, it's 100 million, of which 50% is in company X. You're telling me that company X is worth $1 billion? I've just gone and spoken to an intermediary and they said that they just sold this for, you know, whatever evaluation of 600 million. So in my mind I'm marking it at, uh, 600 million. As a nav lender, what tends to happen if you're too far out on the nav uh, you just do not do the deal. It's just, you're just too far out. But generally what you would do is if you kind of slightly disagree, you just give a much lower ltv. There's less confidence there in the nav. But generally you're working with high quality GPS that are pretty on it. But I would say that there are big like nav is not cash in the bank the way people think. Sometimes it is depends on the asset class. But you have to do your own work.

Speaker A: I'm, um, not 100% sure what conclusion to take from that because on the one side you said that there's a lot of trust around manager marks. And then you said that when you look at the realizations, often they're, they're down on what it would be.

Speaker B: There's a lot of discretion as to what goes into these things. Um, and so you just need to do your homework as an lp, you know, if a manager isn't moving a mark, for example, when public markets have fallen off a cliff, you should almost take things into your own hands and kind of almost mentally mark that thing down with the um, with the markets as such. But for limited partnerships, you know, if you're buying and selling at secondaries, navs really, really matter. But if you're there for the full course, um, as an investor, ultimately it's the cash. The DPI is all you care about. Which is another reason buying, given what we've said here, why people should be also really doing their homework when it comes to evergreen funds. Because there you like a mutual fund, you're buying and selling out of a nav, which suddenly matters a lot because you're buying and selling it. Yeah.

Speaker A: Sharpens the focus on valuation, doesn't it, in a way that the industry hasn't had to contend with before. What are your views on Evergreens within our conversation around liquidity tools?

Speaker B: Yeah, so they are here and uh, they are coming and they're on track to probably be about 20% probably of all vehicles over the next five years is the kind of statistics I've seen. The pros are that it is kind of democratizing, let's say access to the asset class kind of run prudently. They do provide a pretty nice structure for a smaller, um, someone that's not a very large investor that can deal with capital calls, can deal with all sorts of complexity around it. The evergreen structure allows you to like a mutual fund, invest your 500k into the fund and you're done. And then in theory you can Sell it. And I totally see it's a way of tapping. The only way really to tap into that wealth channel, which can add more liquidity. The thing with it is that ultimately whenever you're doing investing, there's kind of an asset liability kind of match to what you're doing. So if you're a Cambridge Associates client, you have in some cases almost infinite duration in terms of your. If it takes 20 years to get your money back, it takes 20 years. Because for whatever reason we've managed our portfolio, some liquids got whatever else the risk. And we can go into kind of the private credit, uh, you're seeing it full swing at the moment, is that wealth and retail money is inherently shorter duration and doesn't necessarily understand that private equity, private credit can be a 10, 15 plus year asset class. And so the way that these things are structured is that you buy and sell out of NAV as an evergreen structure. They tend to have 5% available, say on a quarterly basis, um, which is fine as long as there's significant inflows or not very many outflows. But if you get something like the headlines we've had very recently, private credit, we can go into why I think that might be wrong. But let's say the headlines are suddenly private credit in risk and whatever else, you're going to get the run on the bank effectively. And so you end up suddenly you have to gate funds, um, which is the natural reaction to it. That becomes a headline, that becomes a spiral. Suddenly you have an asset liability mismatch. And that's, by the way, true for an evergreen secondary and evergreen whatever it is, whenever there are more people wanting the money out, you're going to get the headlines and you're going to get the negativity.

Speaker A: But that is all you get though, isn't it? It's the headlines. It's not a run on the bank because the mechanism is there.

Speaker B: Exactly.

Speaker A: So it's really an optics thing, it's an education thing. It's not a structural thing.

Speaker B: Definitely. Certainly not a systematic thing. Where I think that it may go beyond that is just people for some reason were not educated that again, if you expect quarterly liquidity, which is, I think people are doing a pretty good job of trying to educate, but there's only so much you can do ultimately, more retail, wealthy capital will be more skittish. Um, and so again, there's an educational component there. And also how much of your portfolio should you really be in this? And so what you don't want is a wealthy 70 year old thinking putting capital into a vehicle like that and thinking they can draw capital out every year, whatever it might be, um, might be and put 80% of their capital into it. That's where it's a negative.

Speaker A: Sure, sure. They need to be well advised. Although I'd say there's also a cultural element which is, and this is to be a little bit nitpicky, but you said that retail capital is inherently shorter term. But I'm not sure that's necessarily, I'm not sure it necessarily should be the case particularly pension fund. Right. For example. And individuals are just as capable of being long term oriented I'd say as most institutions. Maybe not an endowment, but certainly many institutions. So I do think that this is more of an education. Education and a cultural thing. M. Necessarily something that's technical.

Speaker B: Yeah, no, I completely, I completely agree. I guess one of the other things is that in the other structures for like limited partnership, the common structure, you just literally cannot take your money out. It's just not possible. And so uh, by giving people that option, maybe that's the bigger, the bigger topic as opposed to um. Yeah, exactly. As you say. So I, you know, I, I would agree. So I think they're really valuable. I think they are democratizing access and it's fantastic that you can put your pension finally into longer term assets. But there's an educational component to it and again there's that risk not necessarily even because of the type of investor but just the structure, the implied liquidity. You oversell the liquidity potentially, which is always the uh, that's always the risk. But that's what I say. But going very quickly back to the navs on it again with an evergreen you're buying and selling ah, at a certain navigation. And so when you do your research on a fund, for example a secondary fund, which is a fairly common practice, if you are selling, going back again, you're selling your $100 million portfolio. I'm a secondary evergreen fund. If I buy that from you at 80 cents on the dollar, am I then marking that in my book as 100 cents on the dollar, uh, the day later, which is fairly common practice. And then someone's coming and buying in at that nav, uh, what's the real nav? And that's where you have to do your analysis. Is it 80, the real estate, you know, or is it actually it may be completely correct to say it's a hundreds because there was some structural reason you sold me that because you really need liquidity in the m. Moment. But that's where there's the education really look through how are things marked? How are. You know that's uh, the same way any fund.

Speaker A: So the other thing. So this is the phenomenon of nav squeezing. Yeah. Although I think it should be called nav stretching really. But um. So I spoke with Nigel dawn about this. He was similarly sanguine on this point that this is actually just how the secondaries market. Um, it's just how the secondaries market works and there's no big kind of scandal and I kind of. Yeah. Do I agree? Hang on. Yeah, I think I do. You know I think it seems very controversial and there's a lot of uh, media commentary in, you know, in things like Alphaville and the various substack is criticizing it. But I think again this isn't a structural thing. I think it's a conceptual, philosophical thing that if you, if you, if you believe that the, the price is the value. Uh-huh. Then this isn't right. You should, you should be marking, marking it at 80. But if you accept that what you're dealing with is an inefficient market and there are other reasons for the price that it was marked at and the price you bought it, then it's legitimate and that is how the market works in the institutional world. So.

Speaker B: Yeah, yeah, no, yeah, for sure.

Speaker A: Just had to think that one through. So obviously a lot of the media chatter is around private credit and uncertainty with regards to the SAS apocalypse and the Marx and so on. You're in the credit business. How do you view things?

Speaker B: I would say that I don't think there's a kind of systematic issue. I think when you're looking at the situation you should for a start differentiate between bank lending which is more systemic and kind of non bank private credit lending. What ended up happening really um, when interest rates kind of increased massively is that the broadly syndicated. So really that what that means is lbos were really funded by a bank that um, was going around selling parts of a loan to other people. That was a very public. You could really see what was going on. And even to today that's kind of saying it's about 2.5% or so default rate. So actually nothing systemic there on the private credit side I find. I think if there's any structural weakness it's at the smaller end of the market. I see still pretty rigorous underwriting. I think still around 5% default rates. But this would be caveated that it's very difficult to understand exactly what's going on in private credit because the kind of tendency to extend and amend and refinance out of things. You never get a full picture of the actual um defaults. But what I would say all of the headlines I think are uh extremely misleading at the moment. I think it's what we discussed around the asset liability mismatch of certain vehicles and the gates and this and that that is being conflated with a systematic problem in private credit. And actually yes 30% of non bank direct lending I understand is to software related 20 to 30% software related companies as opposed to 5% in high yield just for comparison. But these are still pretty healthy um, reoccurring cash flow businesses that haven't seen systematic defaults yet. If you are of the belief that all of these companies will be completely wiped out which I think is not as likely as people say because they're all evolving as well and the underwriting standards are still there. It's um, um more of an issue. But the issue in the press has been more about this kind of structural and where there is an issue the people it would be some of the bigger defaults have actually been banks that have lent and that is more of a concern because there you start getting more systemic type risks. Actually ironically people that are complaining most about private credit are often the banks when actually funny that when the non bank lenders are actually um. So I think it's overblown is my m um general thesis at the moment. But keep an eye on it.

Speaker A: How much within your mental model how much do you kind of discount for the uh, extend and pretend type phenomenon?

Speaker B: Yeah, so it's less, less relevant. So because we are effectively lending to kind of a diversified holdco, we still can lend and you know people should be watching NAV lending as well. And actually it has extremely low default rates but it hasn't gone through multiple cycles. But it's you know it's very conservative relative to lending to a single company that could lose its cash flows. But so we can do NAV loans to private credit funds as well. So sometimes it is relevant in terms of looking at how they're underwriting. But I think personally and maybe I'm slightly biased that I find underwriting um, standards amongst the people I deal with to be extremely high and of very high quality. Um, that's not to say at the smaller end of the market where people are, they're winning deals because of competitive laxity on covenants or whatever it might be which I don't witness that. So I can't really say so much, um, but it's something to watch out for. But I don't see a systemic um, risk. We've already had a huge shock with the interest rates going up and yes, there is a healthy cycle going on at the moment, but it feels kind of healthy. It doesn't feel the end of the world that the FT and others might, might be kind of claiming it is.

Speaker A: Do you want to just finish off by telling me kind of a few more words on nodem, your usp, where you go from here, your ambitions. Yeah. So no dem.

Speaker B: So we are so UK asset manager. We're backed by a family office who kind of understand this as a, as an issue, um, called Leperk, which is bank, um, Schlumberger originally, um, uh, family. And so they're fantastic in terms of really refining the product as such for family offices. And we work with private credit, but really with private credit that also provide funding to us as well to do what we do. But really I want to be the go to person for a 20 to $100 million lend. If you're a family office, the market doesn't understand your portfolio, the secondary market doesn't understand it necessarily. For whatever reason, structural or otherwise, the banks uh, are kind of, for whatever reason can't do it. Come to me, I'll give it a really good look, I'll understand exactly, make the effort to understand exactly what is in there and then be kind of that person you can come to to solve your liquidity needs. Where the broader market may be too inefficient, um, to give you what you, you need. And that's really where I want to be or a mid sized fund. I want to be that person that maybe a conversation like this, it's like I just want to understand what my liquidity options are and I make it my job to just understand. Here are the 10 to 15 options you have. Sometimes it may make sense to take a nav loan, sometimes it may not. But um, just come to me for that advice.

Speaker A: Well, good luck with it and thanks very much for steering us through this complex set of options.

Speaker B: Cool, thanks Ross. Thank you.