Family Offices & Private Market Liquidity: From Sourcing to Exit

Speaker A: Build, buy or replace your tech. And how does AI fit in? Every family office is asking. Fo Tech Hub's 4th Annual Tech and Ops conference brings the community together to share what's working, see live tech demos and discuss what's next in AI technology and operations, Leading tools, Voices that Matter and no Pay to Play panels. One of the biggest US focused virtual events in the space. Fully virtual no travel. November 18th and the 19th. Complimentary for single and multifamily offices and their advisors. Learn more and register by visiting the link in the show notes. Hello and welcome back to the Mac Podcast panel series. We've got a uh, unbelievable all star lineup today. Three of some of my favorite people in the family office world. So this will be a lot of fun. We're going to be speaking about private markets, liquidities, sourcing, exit the life cycle and the trends on the private company investment side. Today we've got some real firepower. So let's get started. Let's do quick introductions before we jump into the conversation. Let's start with Bob, go to Hendrick and then close out with Tobias.

Speaker B: Great, thank you Brian. Bob Blair, I'm a family office executive as well as uh, provide advisory and consulting services to a number of families in the United States.

Speaker C: Thanks uh, for having me on. Brian Hendrick Jordan. I chair the family office transaction group at the law firm Nelson Mullins and in a prior life ran private equity and private credit funds backed exclusively by ultra high net worth families.

Speaker D: Thank you so much for having me Brian. I'm Tobias Islep. I'm the founder and CEO at Atlas. We are an AI native multifamily office and asset management firm focused exclusively on late stage technology growth investments.

Speaker A: Okay, so we're going to be talking about secondaries which we'll probably define at some point. Let's stay with Tobias and then we'll work the room a little bit. Take a step back and give me a big picture here. Why is the secondary market even exist? What's happening within the private investment landscape and life cycle that is requiring it or that is even allowing for this asset class to be such in favor today?

Speaker D: Yeah, it's a great question. So I actually started the pre IPO secondaries desk at a firm called Barclays, just an investment bank based in New York and London in 2019 and back then I think there was maybe 10 or 15 firms that were actively doing this. So you had some crossover funds, the CO2s, the D1s. Maybe D1 wasn't even in existence back then, but hedge funds that were looking for pre IPO exposure. And then you had literally a handful of Silicon Valley venture firms that were, that were active in the secondary market. And over the course of the last, you know, seven or eight years there's been an explosion where the market participants range from hedge funds to asset management firms to venture capitalists to fundless sponsors to obviously family offices. I think it's really driven by two primary catalysts. The first is that companies are staying private for much longer than the sort of venture ecosystem is set up to, to invest in. So a typical venture firm is on a 10 year life cycle with two one year extensions that need to be agreed upon by the LP base. The average time it takes a company to go from their seed round to IPO is 15 years and is getting, is getting longer. The second is that the companies are just much bigger. When I started in 2019 the largest sort of private business was maybe 100 billion. I forget what Lyft was was worth at that point in time. This year there three companies that are north of a trillion in the private market. So the market cap of these businesses is top 10 on Nasdaq but in the private markets, so when you have a primary round, let's say Anthropic, that just, that just did their series age, it's $65 billion which is roughly 3x the largest IPO of all time prior to SpaceX which was Saudi Aramco. So the check sizes just cannot be written by the traditional venture capital community if it is like out of a discretionary pool of capital which has made the market for co invest a necessity to be able to fund the businesses of this size and magnitude.

Speaker A: So let's go to Bob and get his thoughts here. What have you seen in today's market that's just such a shift from what things were previously vis a vis private investments, private company formation, pre IPO and secondary investing.

Speaker B: Well one major shift has been that there was always the gatekeepers or the funds and the brokers that were managing the majority of the transactions that went into private uh, companies. What has really shifted is the ability especially for families to go direct into what are premium names so they don't need to go through their typical broker or investment bank or or wealth channel that they did previously. They can make direct investments straight from the family office onto the cap table of companies like Anthropic, SpaceX, et cetera, of course given sizable investments. But that really has changed I think the entire private market and really does lead to additional secondary transactions and those additional Secondary transactions may be families rebalancing portfolios as rounds continue. Again, companies as Tobias, that are staying private longer and then also families that um, would like to get exposure pre IPO are able to enter either through direct additional primary rounds or they're buying secondary pieces through SPVs to get access. So it has really been a uh, much more wider opening I believe of the market for private companies that was previously controlled again by brokers, investment banks, VCs, et cetera.

Speaker A: So Hendrik, let's build on that comment because you've written extensively and you've been on the GP side and now you're working with a, ah, huge amount of really sophisticated family offices. This intersection of these macro cycles that Tobias and Bob referenced, dovetailing with what we've seen as this surge in interest in family offices investing directly, be it through syndicates or clubs or direct to cap table. How does it all come together today?

Speaker C: Yeah, I think you're seeing a more sophisticated consumer in family offices that on the one hand is more sophisticated, as Bob said, in sourcing direct opportunities where they choose. So they're also more sophisticated, as Bob, as both Bob and Tobias said, in structuring SPVs in unique ways that really reflect the idiosyncratic risk return profiles of these families are looking for and idiosyncratic syndicates of families. Right. So I think that is one trend that is going to continue across the industry. There's a, there's a broader component that is not directly on points and family offices, but it's part of the discussion I think it's worth mentioning and that is that more and more retail investors are getting access to private deals through a litany of different products. And in many cases family offices are backing some of these, these platforms that are bringing retail distribution into sought after uh, private deals that previously were reserved for the hallowed halls of a few VCs and private equity funds. So that's the second point I'd make. And the third is that there's a third macro trend and that is as private equity and venture goes through its own cycles where they're stuck and cannot, which happens from time to time due to macroeconomic interests, they cannot generate the distributions the liquidity that they had hoped. That creates obviously an opportunity for whether it's gp, uh, stake sales, whether it's LP distribution of LP interests that are taking over lies to provide liquidity and get access to both family office as well as institutional and non institutional investors.

Speaker A: So let's start the way we did the intros because I want to focus on the origination piece because I think for many families it's about access and allocation, which is why ultimately they're pursuing a lot of these opportunities. So Tobias, and then I want to get Bob's thoughts. Where do these deals actually come from when people say they're sourcing them? Talk to me about origination.

Speaker D: Yeah, so I think it's really important to say that the vast majority of, of this conversation pertains to a very exclusive group of, of quote unquote startups, literally 15 companies. Right. I don't think it's an accurate representation or portrayal to say that the secondary market is liquid for you know, the vast majority of businesses. It's liquid for the anthropics, the andurils, the stripes, the revoluts, the OpenAI's of the world. But even if you're a high quality business and, but you're on series C or series D and you're not yet like a household name, the liquidity profile of that particular security in the secondary market is next to zero. Right? So when you're talking about origination, it originates either one of two ways. It originates on either the GP side or on the LP side. So on the GP side of it you have, you have venture firms that, that basically have a desire to be able to turn TVPI, which is their mark, to market gains into DPI, which is cash being distributed back to their LPs. And so they can do that a myriad of different ways. They can do that by selling an LP a uh, GP stake, they can sell it, they can sell a uh, basket of names or they can sell an individual name. Because of the way that VC math works, usually the majority of the gains in the fund are represented by one to three, maybe four companies. So it's usually isolated to a specific name. The other way that it happens is the LPs say they have to approach the GP and they have to say look, we have a liquidity need or we have a risk management need and we would like to sell our position. We did one in Space X recently where the, it was a pension fund way over their skis as it relates to like what they wanted a good problem to have. They invested at a, at a much earlier stage and they just had the concentration issue. They approached the GP and asked if they could do a uh, small sale relative to their total position size but in notional dollars it was very large and they were granted permission to, to do that. So that's usually how, how these things come about. It's either GP or LP led. Very rarely do you have a scenario where the buyer is able to originate something that isn't already in process.

Speaker A: So Bob, building off of that, you talked about the gatekeepers back in the day and how this used to be a very different space. Give us um, some thoughts around the disintermediation of access and what it means to have relationship driven proprietary deal flow in this ecosystem.

Speaker B: Uh, it's absolutely, at least in as, as tobias talked, these 15 or so names, especially the top names that are floating around, whether it's Blue origin, Andero, Anthropic, SpaceX, et cetera, is it's really a relationship based access. So families will approach me and say when SpaceX was private, interested in allocation into SpaceX at a particular valuation, fee structure, SB structure and really it is working and talking through relationships within the private market, whether it's other families or other people that tend to obtain allocations of these various different names. So it is not a posted transaction or a well known place that is central to secondaries that I'm going to. What I'm generally doing is working I, uh, e. The Rolodex if you will, to find people that also have access to those particular names. So definitely relationship based. It is sometimes pretty opaque what the market is for the particular assets. So it takes several different data points to be able to ascertain whether the supply is actually there. The uh, valuation is what you expect it to be and the pricing and structure is acceptable. So it would be easier if there was more of a clearinghouse or intermediary that was in place to do so. But I also think that that's some of the value in this market right now is because it's so opaque it allows people to obtain significant interest in these companies without a lot of uh, public headlines.

Speaker A: So Hendrick, you are the resident lawyer, so we're going to talk about death, disability and divorce with you. And being the pessimist, how do you counsel your family office clients on these type of transactions about not mistaking access for quality?

Speaker C: Yeah, look, there's no substitute for, on the one hand, adequate and detailed due diligence. There's no substitute for a carefully crafted and thought out investment plan, uh, with appropriate balance and alignment with the long term family vision and objectives. By the same token, family offices have a few unique competitive advantages. What is very often cited as a family office blind spot which is moving slowly. I have found in many cases in these types of transactions it's to be the exact inverse where families get comfortable that Other families are moving alongside them when they are larger companies that in many cases you're just going to do due diligence on SpaceX fundamentally differently than you will on a 50 million revs early stage company. I have found families moving much more quickly in many cases. So I think that is a significant advantage. What I've also seen, and it ties in with the point of uh, direct on cap stack exposure and proprietary deal flow is increasingly the call it intellectual and relational capital that many family offices have, for example influence creating momentum around uh, an investor base, creating an endorsement of a brand or a product or a service line or innovation in a, call it an industry vertical. These are all things that certain family offices are in my view more competitively positioned than many institutional investors. So I think really uh, Brian, it's a balance of the two. On the one hand, not flexing too far out of your comfort zone and sticking to your knitting in terms of due diligence, but at the same time recognizing the advantages you have over many institutions and not being so tied down that you cannot move when in fact a highly compelling opportunity presents itself.

Speaker A: So going to Bob access is not an investment thesis per se when our families are just thinking about the vehicle that they are accessing these type of opportunities with primary rounds, direct secondaries, funds, SPVs, other structures, what are the right questions to ask and um, how should families bracket those or bucket them them in terms of risk reward?

Speaker B: Well if we're, we stick to secondaries at this point the question ends up being where does it sit? Is it direct on cap table? Is it or is it in an SPV as an LP within, within that uh, SPV structure? So direct cap table of course the, the, the most beneficial place to be, it has the most clarity fees generally attached to it unless it's brokered to sell that, that primary issuance on the cap table, but for that secondary that is in an SPV and it's one or two or three layers below the cap table level. Then there's significant diligence into who the GP is, how each one of the levels has been structured, what the fee stack is which can get very very deep once you get several levels down. So the price that you're being offered is definitely not the price you're actually buying at. You're buying at that price plus a fee st, which can include an upfront fee, a uh, management fee as well as a carry. And sometimes there can be double carries, um, double fee structures throughout those SPVs. So the questions that families need to be Asking is where do they want to be relative to the investment? Do they need to be directly on cap table? Do they mind being an LP and coming into an existing SPV when they buy their secondary? And how they want to view the fees relative to this SPVs and the other pieces if they were able to get access. The most beneficial place to start is a primary round. But for a lot of families as well as some institutions, there's small allocations that are available to do so to get into some of the largest names.

Speaker A: So Tobias, how do you think about actually vetting and diligencing these opportunities if they are inherently private and you may have access to only a limited pool or data set associated with the opportunity?

Speaker D: It's, for me it's just a hundred percent associated with who the counterparty is. So we work with a uh, relatively small group of ultra high profile gps that have a long and successful history of taking care of their LPs and that's the reason why they've been able to build tremendously successful businesses. And so I don't think there's a situation where regardless of how quote unquote clean the structure is that we would feel comfortable with a counter party that was completely unknown. Right? We want to be facing off against, you know, something that rolls up to a Sequoia, an Andreessen, a Light Speed, a Thrive Founders fund, something like that, because they're actually the ones in control of the shares, right? Everything else from the, from the moment of the investment to the moment of the liquidity event which takes place at the lockup expiry, that piece of it, you're not going to know whether you're in trouble or not. When you figure out whether you're in business with the right people is when it time for distribution and it is the layer one GP who is exclusively responsible for doing those distributions. So as long as we can get comfortable with that, everything else is usually within the realm of being relatively straightforward to figure out. We don't do a lot of non US structures, so I'd say 95 and uh, 98% of what we do are just like US Delaware LLC or LP structures. There's some international family offices that prefer Cayman or BVI entities or whatever and, and that's fine, but once it moves outside of the jurisdiction of the US for what we do, it's, it's usually outside the comfort zone.

Speaker A: So Hendrick, when it comes to diligencing and how families should think about this, trust is the coin of the realm when it comes to family Office. How much of this is qualitative in terms of the counterparties and how you got the introduction and the known partners involved relative to what we'll refer to as quantitative, the actual papering and the deal structure itself?

Speaker C: No, I think it's a healthy balance of both, Brian. I always say to the way I think of it, very simply investing in a fund and I would extend that to an spv. It's team strategy and track record. Right? So as Tobias said, if you're backing a GP that has a phenomenal track record, a team that has done, which I think is the tricky piece because you could have a team that is very effective at managing direct investments. But how many SVVs have they set up? Uh, how do they deal with idiosyncratic issues around SPVs? I think it's a different analysis, but team strategy and track record I think is fundamental to all of it. I would go a step further because again there is, outside of the call it the tech, larger secondary transactions, which I don't dispute is the vast majority of what's going on. There's still a very vibrant market, a lot of transactions getting done, whether it's GP stake buyouts, whether it's taking out liqu LP positions and that raises a series of quantitative or substantive issues that are critical. If you're stepping into buying a portfolio of a distressed VC fund or a PE fund or a growth equity fund, are you stepping into the shoes of owning a variety of illiquid minority positions? If you are, how many times have you managed out of them and smaller private companies? What are your rights? Do you have board seats? Do you have veto rights? Who are your co investors in those deals? Right. How do they behave in distress situations? What are their time horizons all the way through? Working through your shareholders agreement and your certificate of designations. If you're in a Delaware, uh, C corp with series of pref. How are you going to handle the unique rights and preferences associated with your security relative to others? So it absolutely goes in that case into a very granular quantitative analysis in addition to the qualitative, more subjective components.

Speaker A: So follow up question and then we'll work the room a little bit. To you, Hendrik, how do you think about price discovery? Pierre,

Speaker C: look price discovery to me and I'll let them speak a little bit more to the SpaceX anthropic deals where they have more firsthand experience. But I think what I have noticed, starting with the tech and then I'll move down, is it's been such a frothy market with such incredible demand that you've got a, you've uh, got a vibrant market that is setting the price. Many of these deals are difficult to get into. So it's a little bit more of a uh, more information. I think where price discovery becomes a lot more opaque is if you're dealing with hairier deals, whether it's taking perhaps one third of a PE or a VC fund's position in a variety of private companies and you've got a much smaller buyer pool, you've got imperfect information, perhaps you have unordered financials for some smaller companies. In that case it's a lot more risk and it's harder to price it right. But it ultimately comes down to leverage and it comes down to supply and demand and are you willing to move and what terms are you able to negotiate in those cases? And that's more of a direct deal as opposed to on the SPV side or the layered SPV side where as Bob mentioned, these things can often go up multiples, multiple layers north of the direct cap stack.

Speaker A: So Tobias, thoughts on price discovery but also want to hear your thoughts around what Pendrick referenced, which I know you've experienced, which is not coaching but socializing the concept with some of these families about the deadlines associated and the time it takes to turn a yes or a no.

Speaker D: So I think pricing, the, the sort of transparency on pricing in, in the uh, higher end of the market and secondaries is actually phenomenal. So if you ask someone who is a professional that does this on a consistent basis where an anthropic or an open AI is trading, they should be able to tell you exactly where it's trading. So it, it normally prices off the most recent round. Right. So on an OpenAI 852 billion most recent round and then you'll hear things like 2010. And so the quoting mechanism there is what is the upfront one time fee that's either being charged by the GP or the broker, what's the ongoing management fee and what's the carried interest associated with it? What we've really seen over the course of the last 18 to 24 months, which I think is a uh, relatively new development, is a strong preference from the family office side to just pay the upfront upfront in order to be able to zero out the fee structure moving forward. So it's not unusual that you will have a round, a primary round like say anthropic, that prices at 965 billion and immediately thereafter you'll have the, the stock trading at a ah, 30 or 40% premium in the secondary market but on a 00 go forward meaning there's no additional management fee and there's no, and there's no care. It's much more difficult to access primary rounds on 00 pricing. Just fundamentally it just doesn't make sense. If you're a gp, you're going to the company, you're developing a relationship with the company, you're getting an allocation, you're not going to flip that out for 5, 7, 10%. You believe in long term value creation so you're going to have a uh, carried interest structure. But most things that successfully get over the line in the secondary market, like true secondaries, trade on zero zeros, not traditional carried interest fee structures.

Speaker A: So before going to Bob Tobias talked about the timelines here. I think some families who are unused to the space things move very quickly.

Speaker D: Time timelines are, are very fast. So if you really want a deal the, the, the presumption is that you've already done the fundamental work on the, on the company itself, right? So there it isn't a reasonable request to have the, the seller, whether that's an LP or a GP provide you on, provide you with fundamental diligence materials on the underlying business. Our, our assumption is that if you're looking to buy Anduril, that piece is a solved solve part of it. And so then it's just transaction diligence. And the people that do this successfully have teams, either internal or external that are able to go through data rooms in hours, not like days or weeks and get to get to a decision. I think in this space if, if a deal stretches for longer than I don't know, two to three weeks, the likelihood of it going, of it going through is probably sub, sub 5%, probably lower than that. And I've seen a lot of deals that get done in 24 or 48 hours.

Speaker A: They'll let you run with anything that you want to. There's a lot to cover

Speaker B: on timing yet. Tobias and I worked on some things where that it was literally hours where the, you had to commit or at least commit to substantial due diligence in a uh, short period of time for a family to get involved. So that as Tobias said, the fundamental diligence on the company has been done. So I tend to find the families that I'm talking to have made the decision relative to going into the various names well before they're approaching the secondary market. And most of the investors in those families are the same people that are doing their public Equity investing. So they're looking at this as a, uh, discount to the eventual IPO on these issuances. So they tend to be folks that are already focused on making a quicker trade and being comfortable with doing so because they've already done the fundamental analysis. And as Tobias said, the pricing is on the larger names is well done. So then it really does come down to SPV structure, fee structure, and again, being in a position that you can move quickly and that ultimately the layer one in the SPV that's making the decision to take your, your, your bid for that piece knows who you are and thinks that you're a credible person to add to their, to the SPV stack. So it is important to be, uh, also a credible name to bring to the table that could be underwritten by the.

Speaker A: So that's a good segue to this next area I want to explore. Hendrik, you can start. When families are investing in this world, they say that they own the company. Oftentimes it means very different things depending on some of the things we reference in terms of the structure and the organization. Talk about SPVs, because I think it's probably the most common mechanism for them to access. When they say that they own a company through an spv, what do these investors actually own at the end of the day?

Speaker C: Yeah, it can take a variety of different shapes, Brian. Uh, let me start out by saying what they're not owning, if they're coming in through an spv, they're not owning shares or equity directly into the, or onto the cap stack of whatever the issuer or the target company is. Instead, what they own is an equity interest, sometimes a debt interest, sometime a uh, synthetic interest that can take a variety of different forms in another entity, which in turn owns the equity of the underlying company. And as Bob mentioned, these can go up layer upon layer and they can take a variety of different forms. For example, a family could earn an economic interest in the carried interest or a portion of potential profits associated with one or more SPVs. So there's really no limitation in terms of the sophistication of how you could structure your economic participation. But what you do not earn is, if you're going through an SBV structure, is a direct on cap stack equity interest in the underlying company. And then, uh, Tobias earlier point, that is why in those deals it's really transaction diligence, right? What are the rights that the equity holder, the stockholder and the company have? Because the stockholder and the equity holder can only sell, right, what it owns. So if its rights are limited, if it owns a subordinated security with fewer registration rights associated by way of example, that could. Or with a longer lockup that would reduce the value that in turn would flow into the SPV1 which would then flow up to SPV level 2. Conversely, if you're doing a, call it a non large attack VC buyout that is a, in many cases there through an sb you're dilly, you're doing, still doing your transaction diligence but you're getting more in the weeds of the underlying companies because these are much smaller, entirely different universe than what we're talking about uh, on the large tech side.

Speaker A: So

Speaker D: Ryan, I will say that there, it's rare but there are certain situations in secondaries where you can get a cap table transfer done and that uh, that, that needs to be facilitated by the company. Right. So by the finance suite of, of the company. But if that is a hard and fast requirement of the family and, and it's something that is the company is amenable to, that is a possibility. So you could, you could actually get the company to move the shares from vehicle A, ah, the seller into the vehicle that's being set up by the buyer.

Speaker A: Uh, and are there scenarios or fact patterns where families should insist on that or be wary of the, of the transaction being structured like it,

Speaker D: it's subject to the, the company's desire or willingness to accommodate that request.

Speaker A: I see Bob smiling, so I'm going to let him piggyback on your comment.

Speaker D: You know, cap table management at most of these companies is extremely, extremely diligent and, and they are not really in the business of granting favors or answering requests. But usually once or twice a year there's more or less company facilitated reshuffling of uh, the cap table where longstanding GPs and LPs can approach the company. This just happened in Stripe where they can approach the company and say hey, we want to sell, we want to do it the right way. Can you find us as preferred buyer? And the company will actually do the work of lining up buyer and seller and moving those shares over. If that's available then great. When I represent buyers that are, that are looking for that, if it's something that we can get done, we do. It's just exceedingly rare that companies are accommodating in that respect

Speaker B: and to that, to that point as well. At some of the larger names, a lot of times the company will actually exercise their rover to buy back the shares when they're offered. So there may be that opportunity to sell it privately. But that does not mean that the ultimately in the finance suite of um, an Andoril or an Anthropic or et cetera, they will allow that transaction to occur because they may see that as an opportunity to buy back the shares. So that is one of the places where I've seen families have that opportunity to go indirect because they have some special relationship to do so relative to getting on cap table. But that does not mean you actually get the transaction done just given that the companies often will exercise that RO for

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Speaker C: Yeah, the only other point I would add is I've seen it both ways. There are also situations where you have an activist shareholder that the company actively does not want on the cap stack or for whatever reason does not want at that threshold level. That may create an impetus for them to permit a waiver of a ROF or some type of a transfer restriction to permit a new equity holder to come directly onto the cap table, particularly if that uh, holder can bring material strategic transaction value. But I think that's is Tobias said the absolutely the exception to the rule.

Speaker A: Okay, so Bob and Tobias, they work their magic, they leverage their relationships, they bring this incredible opportunity. The deal comes together quickly, everyone's on board, the wire goes out. It's exciting. Hendrick does a great job papering the deal. Everyone's happy. What happens next? How should a family office think about monitoring these investments? Because we started this conversation, these things stay private for a very long time. I know some families in the SpaceX deal that were in that over 10 years. So you talked about rights, Hendrik, but then maybe we can start with you. What are realistic rights here? Do you have observations? Do you get notifications? You get access to information, manage expectations for us in this space?

Speaker C: Yeah, uh, again, it all starts with what are the legal rights that flow directly to the equity holders in the company. So what are the information rights? Is it quarterly reporting? When do audited unaudited financials get reported? On and on, that's really where it starts. And then how does it flow up? Right. If you're outside the larger tech deals, that becomes a lot more complex. Right, how you negotiate information rights. And in that case you can get for example, observation rights. In some cases you can get board representation if you buy an adequate stake in a, uh, uh, say a VC backed portfolio. But really it starts with A, the information rights that flow from the underlying equity, assuming you're buying equity, and then B, it's, it's also tracking the industry. There's the amount of reporting. You know, as Bob said, many of these, these families are already covering competitors in the vertical. They're highly sophisticated in understanding the macro trends, how multiples are moving and where it is. And they have a very sophisticated view, particularly given the size of these companies and the macro forces that are moving them where they can form a view. Uh, part of the other monetary component is obviously comparable raises that get done, whether it's debt or equity. Tracking the amount of debt that's on the balance sheet, tracking material development, material contracts, customer acquisitions, customer losses, trends in revenue. But that all flows ultimately in a private company from whatever information you're allowed to have given the underlying stack. And if you're in with a competent GP that has access to material information that is not, uh, perhaps available to other equity holders, you're in a preferred position and you're able to mark your assets, I would argue in a more effective way.

Speaker A: Let's go to Tobias and then Bob. How should you think about if you're investing in this space, your ongoing monitoring, what does great look like, what's reasonable? What do you see in the market today?

Speaker D: I think it starts with how sophisticated your internal reporting systems are for tracking all of this. If you're using a spreadsheet to track a series of private investments, you're in a really bad spot. And so there are a number of different technology platforms that are out there. We built ours internally. There are some that are available off the shelf like an arch. I think you need to become really sophisticated in building your internal reporting capabilities. And that should, I think, in, in a great example look almost indecipherable from your public market book. It should definitely be be updated at, at uh, at the, the least at least monthly, if not sooner. You should always be checking your, your share counts and, and whether or not those are still applicable. I saw a ton of, of really bad reporting because SpaceX had gone through a series of share splits and things of that that were unaccounted for in some families internal reporting and obviously you were off by a factor of five going in going into the ipo. So I think technology reporting in private markets is probably the most important thing that I, that I see that is oftentimes just overlooked. I really do believe that probably 90% of families still do this in, in Excel. And then I think that the other aspect of this is making sure that you're putting pressure on whoever the GP is, whether it' GP that's of an spv. Then you just did this and this guy is like normally a fundless sponsor, but they should be providing updates at a minimum so that they're still there. Right? Because again the biggest risk in this is your distribution risk at the point of liquidity. So one of the reasons that I, I shy away from doing deals with independent GPs that don't have an infrastructure around them is even in a world where there nothing nefarious has happened, people do get hit by a bus and I, I cannot be reliant upon a solo operator that has no infrastructure around them to be able to get my ten hundred, two hundred million dollars of shares distributed. And I haven't. And SpaceX a really good example. I haven't heard from him in five years. The company's doing really well. But I haven't spoken to the guy that ran the vehicle that I invested in. So those are the two things that I think are most important. Make sure you're reporting from a technology standpoint is excellent. Make sure that you're in communication with the GP of the vehicle.

Speaker B: I'll echo those points. But when Hendrik talked about information rights, the part of the diligence when you're going into the vehicle is understanding what your information rights are and how they are going to be executed through the documents and what rights you have to assert that you continue to get that information. The other thing is going back to the quality of the gp, especially if you're an sbv, if you have a quality GP that is used to having reporting requirements to its investors, that goes a long way to ensure that you are going to get the level of information that has been promised through those information rights that you're at least getting what all other investors in the investment are receiving. So you are on equal ground relative to how you are evaluating your investment. So it uh, comes back to, you have to do that diligence on the gp. You have to make sure that you have the structure right for that information to flow correctly. And then going back to some, what Tobias is talking about from a systems and a tracking standpoint is that you have the systems and processes to be able to benchmark this investment against its industry and the other investments that you're in so that you can make appropriate decisions about your allocation to that investment going forward.

Speaker C: I would just add one nuance if I may. Brian,

Speaker A: please.

Speaker C: I think the cause, I agree with everything that's been said, but I guess the. Sometimes you're presented with a really interesting opportunity that has hair on it for whatever reason, right? So maybe it's a phenomenal deal, but to Tobias's point, it's a first time GP in the space, perhaps a really talented individual. So I think there, there are ways to cross that bridge if you're intentional about it. For example, you can negotiate your key man provisions in your SPV in a unique way to say, look, if you breach your, your information disclosure reporting obligations, if you know, a GP becomes hit by a bus proverbially or literally, or if other triggers hit, there's a uh, litany of different consequences which will allow you to preserve the value of your investment. So I think as we go up, I think clearly the gold standard, the preferred route, great gp, exactly as Tobias said. However, if you don't end up with that GP and it's still a highly interesting transaction, there may be ways that you can hardwire through legal infrastructure to get yourself protection, uh, in that instance.

Speaker A: So I wanted to piggyback on Bob's last comment about maintaining a relationship moving forward. So talk to me about participation in future capital raises. And this I think is a classic fear, greed versus fear in terms of are you going to be diluted if you don't participate or is there a huge opportunity

Speaker C: to continue to get into lower rounds? How should families think about those? Follow on investment opportunities the right way. Start with Bob and then get Tobias's thoughts.

Speaker B: Well, I guess from a dilution standpoint that depends on the transaction, the valuation, the structure. But just uh, I'll tell you how families are thinking about some of these, these premier opportunities is that they want to get into an spv. If that's all they can get into because it's again as bias. It's difficult to get onto the cap table on um, a primary basis but is to build a relationship with a GP through a secondary to be in the right position to take advantage of the next round if given. If that's a quality GP that's going to be offered an opportunity to continue to participate in future rounds. So most families are looking for that anchor to get in and continue their investment going forward with those names. And uh, again that quality of the GP is what matters if you want to continue to invest and continue to follow that investment until it, until it IPOs.

Speaker D: So as it relates to companies giving pro rata rights to investors, not really a thing anymore used to be standard. Now very few venture firms or GPs are in a position to quote unquote demand pro rata rights right after the first couple of rounds. So it's actually you're. Even if you, even if you wed the the previous round you have no guarantee that you're going to be able to double down on the next round. And there are a myriad of different reasons why companies would actually prefer to diversify the shares across a larger group of, of GPs or investors. When you're getting ready to go public it's like obviously advantageous to have the hands in crossover funds that uh, ostensibly are not for sellers on the lockup up versus a dedicated venture firm which has to sell the shares in order to be able to provide liquidity. There's a strategic element and things of that nature. So yeah, I think when you're thinking about what do I actually have the right to do, you should not expect a pro rata right to be able to invest in the business on the next round just because you invested in either a primary or secondary. I do think that what Bob said is highly relevant though which is you want to develop a relationship with a GP that has high quality access such that you are a preferred lp. And the best way to do that is by making a large investment into one of their deals so that you're on the radar and you're, you're given preferred access on the next one. Not just in that specific name. So not if you, not just if you do it in Andrew and then and raises another round. But uh, if they're doing another high profile deal it's not really in their benefit to uh, go out broadly. Everyone wants to do this right. With the smallest number of LPs possible.

Speaker B: Yeah. And some, some families that I work with actually try to develop a direct relationship with company as well if they're a large check writer, they've come in through an LP relationship, they want to continue. They will work to develop a relationship with the finance. That's because a lot of families are also strategic because of the other holdings that they have. They start to develop industry relationships, they start to attend conferences where they can get access to personnel so that they're a known quantity if they have the opportunity to invest direct but also to be able to advocate for themselves in future rounds.

Speaker C: And I'll just make the distinction Brian that I 100% agree. Everything has said I think something families should consider as the space gets m more and more sophisticated and continues to expand backing really considering backing more secondary managers. Right. Which is an entirely different level of analysis in terms of follow on rights, preemptive rights, MFN provisions, you name it. If you're dealing at the sponsor level rather than at the call it on capstack or even SPV1 level. So I think that's something that families should really consider. If you run into a really talented portfolio manager, uh, emerging secondaries manager thinking strategically, right. If you're going to make a huge allocation, if you want to allocate to potentially helping them build out their infrastructure to scale what they have, that could be a very interesting win win where you could effectively build out an outsourced GP that you have an economic interest in that can help you really think strategically around the secondary vertical. And the value for the manager of course is if it comes in on reasonable terms with a great family office that's looking to increase its exposure. Right. It could have access to a significant pool of capital that will move very quickly uh to help it consummate future deals.

Speaker A: Well and

Speaker D: build on that Brian, real fast.

Speaker A: Yeah please.

Speaker D: I think that's an underutilized strategy by families in terms of finding emerging managers to cause. If you write a $50 million check into an emerging manager specifically within the secondaries asset class pass almost certainly that's material check relative to this person's business and you will get co invest opportunities where you can deploy significantly more capital which more than cover the cost of the fees that you would pay on that initial 50 million versus spending time trying to develop relationships with with companies like Anthropic or OpenAI where the quantum of dollars that you need to bring to the table to really get the time of day is now in the many billions of dollars that's just a reality, right. Anthropic's doing a 65 billion do ground. They're really not particularly Interested in allowing someone to come direct to Cap table with a 50, 100 or $250 million check. That just is what it is and people can, they can hem and haw about that, but I think that is going to be something that continues to be the case. Right. And so finding those, those GPS portfolio managers that are able to provide consistent co invest opportunities and you're an anchor LP of their fund, that would seem to be a better way to increase your net versus trying to go direct to Cap table with developing relationships with the company.

Speaker A: Well, it's almost like you guys read the outline because this concentration risk is very real in this space. I know some families who I'm going to age myself, but I remember a family um, that was a big believer in Uber and they were involved in that deal and then they were getting ready for IPO and they did a, an audit of all the different ways that they had invested and they realized they had a huge position relative to their balance sheet on that deal because the last round that went out on their former mark to market, which just was a massive uptick for them and they just didn't, they didn't track it right or they didn't project it correctly. So Bob, let me just go to you and get your thoughts here. How should families think about concentration risk in the space relative to continuing to participate in this buy versus build, which is the discussion we're having of should you buy this product in the marketplace? Should you try to build it yourself directly?

Speaker B: Well, uh, I'll come back to systems and processes in the family office and just fundamentals in the family office which is maintaining good books and records as you pointed out with that, that family with Uber is that you're mean you have good systems and processes to track your investments relative to the overall portfolio. That you have a portfolio portfolio management structure philosophy and again processes in place to manage the overall portfolio and that that matches what the family's needs are. So that is the problem when you have assets which are growing significantly relative to the rest of the portfolio is they start to be overweight relative to that portfolio. The question is for the family is being overweight in a particular asset and continue to do so an issue or not, and that really is individual family by family, uh, based upon what their risk management is. But in particular names that end up being fairly liquid or will be fairly liquid, there tends to be less concern given that potential liquidity. But then again as someone mentioned, people were in SpaceX for 10 years across 10 years across a family's lifespan a lot can change. So liquidity does matter and especially if your alts bucket gets too large relative to the rest of your portfolio. So there may be times where you will not continue to participate in what are considered to be highly sought after assets. Now what I have seen some families do is when they have that opportunity, they set up their own SPVs and they fundraise around it or they bring a club deal to bear. So I know a family here in LA that has really transformed from buying the assets directly themselves because they've been so successful in the Altsport fund portfolio has grown so much that they've set up their own funds because they have such unique assets from the family's history of investing in these names. So it can become also a profit center, a center for carry and an opportunity to grow your investment team which can be used to offset some of this excess risk you might build if you keep it all on your on your family balance sheet.

Speaker A: So Tobias and Bob have found an extremely compelling opportunity. Hendrik has papered it it. Everything's going great. It's got this huge uptick in valuation. Hendrick, question to you. When you have that first opportunity as an owner to sell to another on another secondary transaction, what are typical rights? Do you get notified? What's the time period? Is it all just a negotiation depending on where you are in the capital stack and legal structuring? Talk to me about the rights and obligations that you have as somebody that potentially could participate in their first liquidity event.

Speaker C: Yeah, it's really going to be driven by number one, what are the terms and conditions of the SPV's org docs and subscription documents? Right. So do you have the ability subject to uh, a rofer? If so, what is the time period associated with it? Is there what, what are the customary control rights and transfer restrictions that would sit within your spv? And to the conversation earlier, if a family controls that entity, it's obviously or controls the GP or is a significant stake in the gp. It's going to give itself a lot more flexibility in driving that liquidity event. Right. So that's really, it's going to be a case by case situation Brian, in terms of how that SVV is structured, what is the size of the position that the family has? Did it have leverage to negotiate fewer restrictions on transferability or is it coming along subject to greater, greater limitations? Uh, but that's a very important point to consider because as we all know the family office and the families shift and what may have been something that uh, on day one appeared to be a very comfortable ten year period. Turns could turn into a uh, situation where liquidity is prized in the shorter term.

Speaker A: So Tobias, let's go to you and then get Bob's thoughts here. Do you typically see, is it purely binary in terms of the dollar figure that we're talking about here and the sizing of these? Is it you've got to sell your whole position. Can you take a percentage in chips off the table? Is it. What is the typical structure these days?

Speaker D: I don't think there's something that's typical. You, you can, the answer is you can do whatever you want subject to the GP and approval if you need the company's approval. But most of the time it's, it's not a, a full sale of the position, it's a trim. You talked about concentration risk in the, in the last sort of roundtables. The goal is to have concentration risk, just to be totally clear because it means that you've made an investment that was so successful that it now represents 90% or whatever of your portfolio. And usually when that's the case, that precipitates uh, a desire to be able to take some chips off the table, but not the entirety of them them. So you see anywhere from 5 and 10 per trims to 50% of the position. The, the thing that's nice if, if it's a sole LP vehicle and they do want to sell the entire thing is that you can, you can effectively have the buyer take over the vehicle. So it ends up being a, a uh, cleaner transaction where they can basically just GP the entity. So, so that is nice if and when it happens, but usually not the case.

Speaker A: Thoughts on the right questions to ask? If you're a family that has this first opportunity to, to take some chips off the table, how should they be thinking about it?

Speaker B: Yeah, I uh, always go back to your investment policy statement and why you invested in the asset to begin with and how it fits within your portfolio. So if the opportunity to sell is, is why, why are you looking to sell within the auspices of that investment policy statement? What is happening in your overall portfolio? So you have to start with the why would I sell and why do I need to seek? So once that's been determined, it's really determined all the fundamentals. What's the valuation in the market? What are the rights and obligations that come with the opportunity to sell? What is the quality of my counterparty? All of the usual questions that you need to ask when you're selling an asset about your counterparty and about your evaluation. But ultimately for most families, it comes down to, to the need for the liquidity and also the tax implications of that sale. So, and I think that's one of the places where I'm often asked to come in and look at a particular asset and think about how it relates to an overall portfolio and where things usually hit a tough spot related to structuring a sale ends up being the tax implications. So generally most people are keeping their books and not thinking about the after tax, the true after tax benefit of that investment. So often I'm telling them to bring in tax advice in advance of that decision to sell or not to sell, because there can be ways of structure around a sale that mitigates some of that impact. And Heinrich probably has more thoughts on that.

Speaker C: Yeah, I mean, there's a litany of different rollover techniques that you could use. I'm not a tax expert, but there's a litany of rollover techniques and deferral techniques that you could use. It's going to depend on the idiosyncratic, uh, tax profile of the issuer. And also there may be situations where losses could be used quite effectively. Not that these are loss situations, but, uh, you may have some loss situations that you can offset so that if you do generate some income, it, uh, may not be as detrimental as in other cases. But Bob's 100% correct. Tax counsel, Tax Advisors needs to be involved from day one. There needs to be iterative scenario planning as the world shifts and as the tax profile of the company shifts to consider when is the optimal time and how should it be structured.

Speaker A: So, Hendrik, let's stay to you on this final phase of the conversation. I know we've covered a lot of ground quickly, but we made a huge amount of progress. Talk to me about ipo. So pre post ipo, what does. What changes from a legal and a structuring perspective as an investor, once we get into this phase of the transaction,

Speaker C: once the company becomes public, I. E. Goes through its initial public offering, it becomes subject number one to a litany of different reporting and regulatory obligations, which include mandatory disclosure obligations under the 34 Exchange Act act that is public, publicly available, filed by Edgar and that all investors will have access to. Uh, it also creates, uh, a shift in governance, shift in operating procedures, a shift in financial reporting. Many companies pre ipo, especially the larger ones, are already complying with it. At that level, it's really less, uh, uh, I mean, they're effectively IPO ready and have been IPO ready for a long period of time. But there is obviously, uh, a level of comfort that you get. The second critical component that you got to think through is what if anything are your lockups and what if anything are your registration rights that you directly or indirectly can get your liquidity through. So that's a critical level of analysis that needs to go into, uh, all different components of your underwrites and your overall strategy as you think through, you know, your pathway to liquidity. Many companies, and again I think the ones we're talking about here are straight ipo, but many companies run a deal track process where they would pursue an IPO and an M and a transaction. That's another conversation and something to think through if you're dealing with large companies, perhaps not of the size of the ones that have been mentioned on this call, but those would be the important ones. You want to make sure if you're a family investing through an sb, that whatever rights you get, and I know I've broken record on this, needs to flow through to you, you know, as best you can. And you want to make sure that to the extent information you receive, if you do come in, in a preferred position, you need to be very careful about becoming subject to, for example, insider trading obligations. If you're a shareholder of a certain size or even if you're not, just by virtue of the relationship that you may have with the gp, uh, you need to be very cognizant that how that information is what you get access to and what you don't. So I would in a nutshell, counsel anybody at that point in time to sit down with their securities council, understand the reporting obligations and rights, understand what additional obligations may flow through to you, even if you own a single share of the company, but you have access to non public material information.

Speaker A: So Tobias, Bob, let's, let's go to you. We'll start with Tobias, then get Bob's thoughts. What does it mean in your opinion from an investment thesis perspective once we head into the IPO post IPO phase.

Speaker D: So it depends on what you're, what you're looking to do as it relates to liquidity now that the company is, is public. So I think the standard thought is like I participated in, in the, in a either primary or secondary, uh, investment opportunity. The company's now public and so I have to wait six months in a day and then I'm going to get my distribution and I have to figure out like what I want to do with those shares. I think most of the time that's actually not the case. Meaning that investors have a series of options that are available to them. For example, we talked about what do you actually own? Okay, well if you own the equity interest or the economic interests in a security, but you're not actually the equity holder of record on the cap table, it is almost certain that you are able to freely trade, trade the stock including short and, or hedge that position prior to the lockup. Right. And so a lot of the work that we have done over the course of the last six months as we, as we did the SpaceX IPO and as uh, we get ready for Anthropic's IPO and then OpenAI's IPO is actually finding the opportunities where the buyer, the family or the fund is able to hedge ahead of time. And that's really, really important in terms of making, making a uh, risk adjusted assessment as to whether they want to do the deal. Because most people don't be subject to a standard lockup or what's becoming increasingly regular is the company approaching the largest shareholders which tend to be the best GPS and saying hey, will you guys agree to an even longer lockup? And so now you're in six plus six so year long category, year long territory. The other thing I also mentioned to uh, clients that we represent is every one of these operating agreements says that the distribution is at manager described. The manager does not crystallize their carried interest until they do the distribution. Obviously that's their business in terms of how they actually make money. So if the stock is significantly below price that they would want to sell it uh at they're not going to do the distribution. You look at what SpaceX, what happened with SpaceX, you had a bunch of, of hedge funds and retail short activity in the name. Stock broke IPO price. It's trading at 105, 107 in into the first lockup. No distributions occurred. Stock rallies 40% in a week as a result of that. Right. So just because a lockup has occurred does not necessarily mean that you're, that the GP is in a position or willing to do the distribution.

Speaker B: Agree Tobias? I think that the one mistake that I hear investors and families make is that the IPO is the end of the road on the investment. It does not mean liquidity. It means that you may be able to freely trade at some point of course after lockups, but it does not mean liquidity. It really does matter. As Tobias is saying, the structure of the vehicle you went through the actual rights that were negotiating with those vehicles relative to the ability to sell those shares. So it is to me, it does not crystallize liquidity as some people assume it does. And to be very careful that you're not planning for that liquidity relative to the ipod. So really, again, these are illiquid investments up until the point you're actually able to trade the securities and get liquid. So there it's not buying an S and P etf. You really need to assume that these still are difficult to trade illiquid investments until they're more freely traded trading.

Speaker A: Well, this has been terrific. I want to thank all of you for coming on today. We didn't get to everything I wanted to. We'll have to do another session. But to maybe close out today's conversation, we'll start with Bob, then go to Tobias and then Hendrick. Best experience share you could give. If you're a family office, principal or investment manager listening to this conversation and you want to be in this space, what would your best experience share or piece of advice be?

Speaker B: My advice, you need to be committed to being a participant in the space is do the work upfront and be able to move decisively. So I think being a visitor to the space doesn't work. So if you have a particular point of view on the market and a particular point of view on the different names, you need to do your work ahead of time. Time because the level and quickness of execution that is expected is. So you can't be a visitor, you can't be a tourist. Again, do all the work upfront, all the fundamental analysis, the reasons that it makes sense for your portfolio and your expectations for your portfolio going forward. Again, ACE is a highly, should be deemed a highly liquid investment that has significant, has significant risk and be accounted for within your ALTS portfolio and then again, again do all of the work necessary that you can move very quickly.

Speaker D: So I think the first thing for me is I, I think most family offices, if not all family offices, should be involved in secondary markets. Secondary markets by definition are, are bigger than primary markets. Like the US Stock market, for example, is a secondary market primarily. So this is just secondary transactions that are taking place in privately held companies versus public companies. Companies, the transaction volume is quintupling year over year. I think that continues for basically in perpetuity. These companies are, we are in the phase of the cycle right now where meaningful businesses are getting built. These are uh, companies that are putting data centers in space that are literally solving, solving cancer with AI, that are building large language models. This isn't B2B software territory anymore. The last cycle was right. And I think waiting until these companies are publicly traded assets to be invested in them is going to be hurt your performance significantly and basically you miss out on a generational opportunity. Um, but I think the most important thing is that you're operating with high quality GPs and high quality intermediaries and you need to do the work of figuring out who's going to be on the team and making sure that that is paramount above and beyond any sort of perceived high quality deal. Because if you're not in, if you're not in, it could be a great deal, but if you're in it with the wrong person, then bad things are to happen.

Speaker C: Yeah, I would just add, consistent with the prior comments, that the asset class is here to stay in. Uh, my view, we're in the early days. I think you're going to find a lot more sophistication that's going to ripple through it. What I would strongly consider if I was CIO of a single family office or a multi family office, is doing one of two things. Either bringing in my own in house dedicated team that can on the one hand find the right gps, or alternatively I would look at seeding a great gp. Seeding my own secondaries, fund quotation marks by allocating capital to it, giving them a platform, giving them resources, but getting higher quality exposure to an asset class that I think cannot be ignored.

Speaker A: Well, hire us to help them find their cio. Hendrick, I think is where you start.

Speaker C: Clearly I missed that one.

Speaker A: Um, this is great, guys. I know we covered a huge amount of out of Waterfront today. We will do a follow episode to get a bit more granular because I think there are some technical components that people still want to know more and learn more. There's not enough information out there. So thank you for coming on and sharing your wisdom and your experience, your knowledge. It was terrific. So we'll do another one soon.