Secondaries first: rethinking private market liquidity

Welcome to Beyond the Benchmark, the EFG podcast with Moz Afzal.

Moz Afzal:

Hi everyone. So we are going to talk about secondaries today and I'm very excited to have Jake Elmhirst from Coller Capital. Jake, welcome.

Jake Elmhirst:

Moz thanks very much indeed and thank you very much for having me here.

Moz Afzal:

Yeah, no, it's great. It's first time on the podcast, so we're going to do a little bit more of an intro to Coller and to yourself. Maybe just talk about yourself first. You joined Coller as head of capital formation in 2022, but before that, for 25 years you were at UBS. Maybe talk us a little bit through your journey through UBS and then how on earth you ended up at Coller.

Jake Elmhirst:

Yeah, sure. Very happy to do that. So yes, I joined UBS back in the mid '90s. Before that, I started my career as a lawyer actually with Freshfields. I was a tax lawyer at Freshfields. Grew up in Yorkshire, the son of a dairy farmer and I still have some farming interests up there. So yeah, 25 years at UBS. Most of that time actually was spent in the investment bank where I started a fund placement business in 1998 with a couple of colleagues and moved to the US. I then in 2015, 2016, pivoted towards UBS Global Wealth, almost by accident through one of my colleagues from the investment bank who had moved over to run products and services in global wealth management. And he had a private equity business, which was subscale and not really delivering what he need. And there was a big drive to try to increase the penetration of private markets in client portfolios viewed as a great thing for the clients and a pretty good thing for the bank as well, but he didn't really know how to do it.

So he came to me for some advice and some advice turned into a business plan, which turned into them asking me to come and run that business for them. So I agreed to do that in 2016, moved back from New York to London. So what I did was to explore the perpetual space, what in those days was called semi-liquid space. And there really weren't very many opportunities out there, but we found one and did some education around it and actually built up a lot of interest quite quickly. And so that gave us the confidence to really lean into the semi-liquid offering. And in 2021, I hit my 25th anniversary with UBS and I decided I was going to retire and go back to the sheep farm.

So end of the UBS chapter and it was a great chapter for me. And then I started to get a little bored and I was getting calls from various different GPs. And the one that interested me the most was a call I got from Jeremy Coller at Coller Capital. And what interested me, Coller is Jeremy basically started the secondaries industry in 1990. He's often referred to as the godfather of secondaries. What I saw was an opportunity to take a business that hadn't really looked at the wealth opportunity and create wealth products out of what they had, essentially create perpetual funds that could leverage their investment expertise and deliver those to the wealth market. To do that is not straightforward. It's quite costly. You need to build quite a lot of infrastructure. The valuation process is different. You're offering monthly valuations versus quarterly. So it requires real commitment and conviction from a GP.

Moz Afzal:

As you said, Coller invented liquidity for institutional investors, I think is the way you described it, which I think is an apt description, but it's much more than that now, right? Because you've got situations that certainly for us even at the moment, by the way, secondaries was our top pick for 2026 in terms of asset allocation within private markets. And the reason why we saw it was challenges that say Donald Trump was putting on the endowments to pressure they're putting on them. These guys typically had far, far more private equity, private markets in their portfolios and we felt, well, there's probably going to be a lot more sellers on there and quite frank end of life funds, vintages that are coming to the end of their natural life and possibly a lot more opportunity that comes out of that. But talk us a little bit about secondaries in terms of their sort of structure, what sort of opportunities occur within secondaries, maybe the background, and how it's evolved. You talked about perpetuals now, but how that's evolved over time.

Jake Elmhirst:

Yeah. Look, well, we see a very similar picture. It's no secret that the traditional sources of liquidity for private equity, so M&A, IPOs have slowed quite considerably. And so you have this large body of unrealized NAV that is sitting in funds that were raised five, six, seven years ago and it's continuing to grow. So the assets themselves are performing okay. They're just not providing the liquidity back to investors. At the same time, investors have continued institutional investors have continued to increase their exposure over time. So the average exposure I think for institutions now is in the mid 20s and certainly for the endowments, it'll be higher. It'll be closer to 40%, but their programmes have been built in drawdown structures and their commitments assume that they're going to receive distributions back, which can fund capital clause when they come. And if the distributions slow down and you end up in a net cash deficit position, it starts to impact your portfolio and starts to result in imbalances and that puts pressure on institutions to sell.

So we very much see that and not only does it put pressure on the LPs with their portfolio constructs, it puts pressure on the GPs because in order to raise new capital, you have to send distributions back to your investors. So there's plenty of incentive or reasons, really a liquidity squeeze to drive growth in the secondary market and it has grown. So if you look at the market today, last year there were about 240 billion of secondaries executed in the market that's roughly, but still only roughly a couple of percent of the unrealized NAV that sits in the market. So it's a relatively small piece that turns over every year and it wouldn't take much to drive that much higher. 1% change is a massive change in turnover, but those are the forces that are causing it to occur.

So when you think about going back to my decision to join Collar, why was I particularly interested in secondaries as an underlying asset class for the wealth opportunity? It has a number of features which make it appealing. First of all, it's very, very diversified. So if you're just starting to build a portfolio in private equity, you can build diversification very quickly. The second thing is that you're not buying into a blind pool. So you can buy into known assets, you can assess value, you can assess performance and that reduces risk. The third thing is that you're buying in partway through the story. So you are closer to the point of realisation, which means that cash comes back quickly. In fact, when we buy diversified books of LP positions, we're receiving distributions from the moment we buy. And lastly, but probably the thing that gets talked about the most is that we are almost always buying these assets at a discount to NAV.

So that gives you tremendous downside protection. What's the outcome being? Well, if you look at the returns from secondaries over the last 20 years, and this is preqin data, they have performed in line of slightly above buyout funds, but the dispersion in returns is much lower. And if you look at it from a loss of capital perspective, around 2% of secondary funds over the last 20 years have managed to lose money. I'd say those were idiosyncratic situations. You compare that to buyout funds, it's a double digit percentage that lose money. So it's just a better risk adjusted return. Now thinking about perpetual funds specifically, what do you need for a perpetual fund to work?

You need line of sight on cash because what you're doing is offering liquidity on a periodic basis. We do it quarterly, most funds do and you offer up to 5% of NAV by way of liquidity each quarter. The underlying positions in a buyout fund don't behave like that. Certainly for the first five years of a fund, there's probably very little liquidity, but in a secondary portfolio, you have a much, much better line of sight on cash. And it's why you've seen perpetual funds grow up more quickly in, for example, stabilised real estate assets, the REIT market, the private REIT market, and also in credit in BDCs, you've got a good line of sight on cash.

Moz Afzal:

Yeah. So the key thing is that sort of downside protect ... Well, not downside protection, but downside sort of buffers that you have due to the big discounts that are coming through and of course that easier access to liquidity. Certainly we're seeing some of that playing out with the BDCs at the moment. Any thoughts on that in terms of some of the challenges that we've seen within private credit in particular at the moment? Clearly the big challenge is within a perpetual structure when you suddenly have these sort of big wall of redemptions, you talked about the 5% gate, which is kind of critical. People got to understand that. I don't think people happily buy something and they just realise that there is a gate and then they have to wait and that you do have that challenge of the mismatch. How do you kind of deal with that? Because I think that's what the private credit funds are suffering at the moment. Credit spreads are record lows. You wouldn't expect naturally that those credits would be in a worse position than would normally be at this point in the cycle.

Jake Elmhirst:

Yeah, I think that's right. I mean, there's two components to this. And by the way, Coller is one of the largest investors in credit secondaries, but I think what we see in credit is the actual credits, the underlying credits themselves in the senior secured space are performing well. And actually with rates coming down, interest coverages, if anything, improved and they're in a slightly better position than they were 24 months ago.

I think this is being driven by a couple of things. Some idiosyncratic situations with losses that were widely reported by the press, not necessarily seeing a secure direct lending either, but the read across was there and comments from high profile people in the banking space. And then in addition to that, the concern that is growing around the impact of AI. And AI is, and I'm talking now about software exposure and software represents probably a third of the whole private equity markets. So if you're playing in direct lending or you're playing in private equity, then you're going to have software exposure. It's still too early to know exactly how this plays out, but there'll be winners, there'll be losers. The problem in credit is the winners don't make you more money. Your upside is capped So if you miss, it's costly. So I think that's driven some of the redemption pressure.

Now, how does this actually work in a perpetual fund where you have a 5% gate, it's there for a reason. These products are designed so that the fund doesn't put itself in a position of being a fourth seller because that isn't in the interests of its investors. So provided there is sufficient cash coming off the portfolio to meet that 5% per quarter, these funds can continue for quite a while. Just paying out that 5% and they'll tough it out and wait for the market to stabilise. So it's important when you talk to clients about this, these products are not liquid. They are liquid products. They're illiquid for a reason. The underlying is illiquid. And so this is a design feature, it's not a bug.

Moz Afzal:

So typically when you're talking to wealth clients and you're talking about sort of portfolio construction, how do they need to think about secondaries in the portfolio construction part? Obviously they'll have allocation to credit, they'll have to say to buy out, they'll have allocate to a bit of VC, but probably not much. Then you've got secondaries. How do they need to think, what is the kind of classic optimised asset allocation if you can find one within the private markets context?

Jake Elmhirst:

I think it comes down to what's your need for liquidity and your risk profile. But if you just took the equity portion, you could allocate the whole thing to secondaries and sleep well at night. It is a sleep well investment. You are never going to make a four times your money return in three or four years out of it, but over time the outcomes have been very, very predictable, which makes it very appealing certainly as a core holding in that equity portion. So the way that we think about that when we talk to investors is view it as a core holding and build satellite exposures around it. But if you've got a solid core that gives you a predictable outcome, then if you want to do things that are higher up on the risk spectrum, do that, but don't leave yourself overexposed unless you really want to.

Moz Afzal:

Yeah, sure.

Jake Elmhirst:

And you know what you're doing.

Moz Afzal:

Yeah. So let's talk a little bit about why now. We touched upon it a little bit earlier, but what's going on in the marketplace? Why is this lack of liquidity out there? And what are key drivers to that that obviously creates the opportunities today versus other parts of the cycle?

Jake Elmhirst:

Yeah. So I think it is a slowdown in the traditional exit mechanisms and why are IPOs less prevalent today than maybe they were 10 years ago? I think because private markets have become bigger and deeper and there's an advantage if you're managing a private company of staying private longer. It gives you more flexibility as a CEO to manage your business. So that's one factor. I think on the M&A side, the slowdown there is partly due to the fact that expectations around outcomes have become a little cloudy and private equity's had a good run for a while, but some of the noise, particularly if you look at the software space for example, around AI, creates uncertainty. And when you see that and you see public market marks coming off, it becomes more difficult to exit at certainly at a price that you think is optimal as the owner.

So what is that leading to? Well, if you're a GP that owns great businesses, one of the hardest things for a buyout fund to do actually is to originate. They spend 90% of their time and energy originating great businesses with great management teams. Once you find one that's on a steep growth trajectory, why sell it to one of your competitors because secondary buyers make up probably a third of the M&A market, maybe more. Why sell to one of your competitors? If you could hold that business longer, then why wouldn't you do that? And the answer is today they can because the GP led market has evolved to a point. These are continuation vehicles. How does this work? A GP owns a great company. They're probably in year seven or eight of a 10 year fund and they go to their investors and say, "We'd like to own this longer for another five years. We're going to put it into a new continuation vehicle." You have the choice to roll into that new vehicle or you can take cash. And if the investor elects to take cash, they've got to find that cash.

Who provides the cash? It's us, the secondary market and we price the asset, we negotiate the terms with the GP so it provides a hygiene mechanism for the GP to be able to tell their LPs this is a fair price because at the time that this GP led occurs, the GP led's position is shifting. They have a carried interest which has accrued against that asset that gets crystallised and that carrier's rolled into the new continuation vehicle. We require that. We wouldn't want to do a continuation vehicle unless the GP was rolling their carry out and actually our preference is they put more money in because what we want to know, they know the asset best better than anybody. We can do all the diligence we want on that asset, but they've owned this asset probably for three, four years. They know the management team, they know the market position. We don't want to be buying from the GP, we want to be buying with the GP.

Moz Afzal:

Of course. Yeah.

Jake Elmhirst:

So that's become a big opportunity and in a way what you are now seeing in the secondary market in the GP led market, if you know what you're doing, there's the opportunity for positive selection buyers because what's the GP incentivized to do at that point? They want to buy at the low end of the fairness bands. So if they really are looking to invest with you, you can buy assets at great assets at very good valuations.

Moz Afzal:

Just flipping back, I guess the last two points for this podcast really, just flipping back to secondaries and the evolution, obviously the asset class is growing and obviously Coller's growing, which is great, but is it more competitive than it used to be? How the dynamics changed over last, say, five years? I guess it was a pretty green field in 1995 and even throughout the 2000s and the early 2010s, but obviously there's a lot more pressure from competitors coming. Do you see that yet or is it still greenfield?

Jake Elmhirst:

Look, I think when you look at the largest players in secondaries, the names haven't changed very much at all. I think there are areas where you're seeing managers breaking in. There are a number of buyout firms who are saying, "We'd like to be in the GP led space." But they are at a bit of a disadvantage because often they are competitors of the GPs that they're trying to do GP leds with. Of course. Yeah. And so it can block them from certain situations.

Moz Afzal:

So you guys being the sort of independent arbiter is actually quite important in all of this.

Jake Elmhirst:

And scale really matters because if you aren't at a certain size, some of these transactions are large and-as a space has got bigger, the transactions are large. Yeah. What you need as a GP before you embark on one of these, you can't take the risk of a fail process. So you need to know you're working with reliable transaction partners and that's something that we can prove.

Moz Afzal:

So let's move on to the opportunities. And so where you see opportunities, we talked a little bit earlier about RMB, which I thought was quite fascinating, but beyond that, where are the best opportunities for secondaries at this point and where Colin is actively looking?

Jake Elmhirst:

Yeah. So we have a very global footprint and we operate from 11 offices globally. What we often describe ourselves as is a global investor that buys locally, invest globally, buy locally. And we're looking for situations that are less intermediated or where the seller is selling for non-economic reasons and where relationships matter. If you look at our portfolio construction, geographically two thirds of what we invest in is in the US and a third is outside in terms of the underlying exposures, but these are buyout funds principally, but look at some of the dynamics that are going on with sellers today. We have a very big presence in Asia and we've been able to buy portfolios from Asian sellers who for various reasons do not want to hold US assets any longer. Those can be very interesting situations. We've seen equally US investors in Asian assets looking to sell or being forced to sell those exposures and our exposure to Asia in Coller equity actually is very small. It's about 5% and it won't grow from that, but we have an R&D fund, as I mentioned, and also are in the process of launching an Asia secondaries fund, closed end fund, specifically to capture those opportunities. And we're looking for idiosyncrasies and sellers who are selling for non-economic reasons and often having those local relationships can help. On the GP-led side, I mean, again, the pressure is there on every GP to raise money. This is a way to send some liquidity back and it's a way to own your best assets longer. And I think that trend will continue. Even when liquidity comes back to the market, that trend will continue. This is a proven way to hold onto great assets.

Moz Afzal:

And maybe my last question is obviously we have SpaceX, we've got a few of these very large transactions that will eventually sort of come to maturity. Do you expect any sort of impact from that? I mean, obviously some of these transactions are very big and very widely held if you like. What is the waterfall, not necessarily from an investment perspective, what's the waterfall impact of that and how that might impact secondaries or indeed the wider market?

Jake Elmhirst:

Yeah. I mean, we don't have a lot of exposure to those types of businesses through our portfolios. So when we're looking at assets as a buyer, it doesn't really feature. No, of course. Is it going to impact liquidity in the overall market? I think the biggest impact actually is when you look at performance of public equities, the S&P 500, what's driven S&P 500 performance at seven stocks and how long can that continue? Sure. And if that trend stops, then it's going to cause a lot of investors to think long and hard about the split of public equities versus private markets in their portfolios. Long-term wealth creation, I think you should do both, but private markets should be a stabiliser in a portfolio and it will deliver more predictable outcomes. It has done over the long term.

Moz Afzal:

Yeah. I guess my thought process around that is I guess the waterfall, i.e. Investors have been waiting for some of these events to happen for some time. Typically, do they reallocate those assets? Do they just sort of re-spread them out? For example, if you've got a private markets portfolio, something comes to the end of life, you've got your liquidity and in this case we're talking between Anthropic and a few of these, we're talking two or three in with Canva and who else is on Databricks and all these big names are on there. We're talking about trillions of dollars here. We're talking about two and a half, three, four trillion dollars.

Jake Elmhirst:

Yeah. So look, I think recycling that cash back into the market, recycling into private markets makes a lot of sense. If you can find the next Anthropic, tell me what it is.

Moz Afzal:

Yeah. You can come on the podcast and let us know. Yeah, absolutely.

Jake Elmhirst:

But I think private markets, and particularly if you're doing it in perpetual funds, it gives you a bit more flexibility in your portfolio because you can put money there and if you want to do something that is more tactical down the line, you've got the flexibility to do that.

Moz Afzal:

No, I think that's actually a kind of critical point in terms of, again, thinking about portfolio construction. If you've got that perpetual holding, allows you to be a little bit more tactical, not completely tactical within the rules we were just talking about, but it does allow that. And I think that's something that often gets missed, I think, in the discussion as well. So Jake, thank you very much. That was a fascinating and very interesting discussion. We'll certainly love to have you on again soon to tell us about what new opportunities and how the asset class is developing. But in the meantime, thanks again.

Jake Elmhirst:

Well, thank you very much for having me and it's an easy commute here in London because I'm four floors below you. So happy to come up here anytime.

Moz Afzal:

Yeah, I was going to say as well, certainly one of the more easier meetings to schedule, even on a day that we have a tube strike. So thanks again, Jake. So that wraps us up for today and you're listening to Beyond the Benchmark with Moz Afzal and we'll speak to you again soon. Thank you.