Investcorp Strategic Capital Group's Anthony Maniscalco - the evolution of GP stakes

0:00Deirdre Bolton: We're going mainstream.

0:02Anthony Maniscalco: Hi, I'm Michael Sigmore, founder of Alco's Mainstream and co-founder of Broadhaven Ventures. We are live from Super Return here in Berlin, having conversations with the industry's leaders about things that are shaping what's going on in private markets. Who better to have a conversation with than Anthony Maniscalco, who's the founder and managing partner of InvestCorp's GP Staking business. Yes. GP staking is, in many respects, a culmination of so many different industry trends all rolled up into one. When you think about the evolution of asset management as a business.

0:35Deirdre Bolton: Yes.

0:36Anthony Maniscalco: Seeing GPs and the evolution of their firms, where private markets are headed. I think your perspective is going to be fascinating. Thank you. Really excited to get into the conversation. Before we do, though, I think let's take a look back because you've been in the stake space for 18 years. Yes. You've seen the evolution of the stake space in addition to the evolution of private markets more broadly. Maybe those things actually either run in parallel or intersect. So we'd love to start with your background and just kind of hear how you got from where you were to where you are today at InvestCorp.

1:09Deirdre Bolton: Absolutely. My path has been a little bit nonlinear. So I spent the first 15 years of my career doing leverage finance. So I covered private equity firms, finance buyouts, originally B of A, and then Lehman. And then in 07, we were heading right into the GFC. There's no more leverage finance. And there was an opportunity to take over a group at Lehman that covered alternative asset managers as companies, not as funds, but as businesses with enterprise value. This group had taken Blackstone Public, OXIF, Fortress was very innovative. When I took it over, again, we were heading into the GFC. That was really shut.

1:43Deirdre Bolton: There were no more capital markets. So I had to find a reason to exist. And M &A was what we focused on. And interestingly, GP staking. And part of that was because the team that I replaced at Lehman, they went to another platform and started a GP staking business. And I was able to get mandates from GPs and advise them on selling stakes. And so this is when the industry is, as you said, was quite different. It was much more focused on the hedge fund space. And I built a business. I built a boutique M &A business there, lived through the bankruptcy, was at Barclays for five years, and then was the first hire into Blackstone staking business in 2012 and joined InvestCorp eight years ago to build the staking business there.

2:25Anthony Maniscalco: You talk about the business of GP Stakes being very different. The way in which the market broadly, both public and private, looked at alternate asset managers was very different. What would you say were some of the biggest differences between then in terms of how both public investors, you mentioned a few firms went public, Blackstone, Fortress, Oxif, and then a few others, Apollo a few years later, KKR, etc. How did the market look at asset managers as businesses?

2:56Deirdre Bolton: It was quite different because this industry was a little bit of a niche within the markets in that, again, we were focused on hedge funds. And the reason for that was because most of the groups that started these funds to invest came out of banks. And banks had been doing this on balance sheet pre the GFC. So they were buying stakes in groups like D.E. Shaw or Avenue really to get access to business, get access to prime brokerage, sales and trading. And when the GFC happened, that was shut. But a lot of those teams at the banks then left and started funds. And so their backgrounds were all around hedge funds.

3:35Deirdre Bolton: So the industry was really focused on hedge funds because of that. At the same time, private equity at that period of time was under a little bit of distress. Exits were stalling, fundraising was stalling, and hedge funds were taking advantage of the dislocation. So that's where the staking industry was. And that was how it was until, call it 2015, 16, when the first staking deal in a private equity firm happened. And then the light bulb went off that if you're going to own equity in a business, there's more enterprise value in a private markets firm that has locked up capital, less key person risk than a hedge fund might.

4:14Anthony Maniscalco: So let's unpack that a little bit more because I've actually even written about this. I've said that alternative asset management businesses are better than SaaS. If you think about it, you mentioned things like contracted capital, long-term contracts, generally re-ups from LPs very often. Walk us through some of the features of GP stakes and why it might make an interesting investment.

4:37Deirdre Bolton: Yeah, so a couple of things. One is it's hard to get access to the growth of private markets as an investor. and doing it through a investment in a staking vehicle or in a GP, you're getting access to the growth of the industry. That's very hard to get. Two is these assets, as you mentioned, they have management fees, they have carry, they have balance sheet investments into their funds. And those management fees are contractual. It's very unlikely that an investor is not going to fund their commitment when capital is drawn. So you have 10 years worth of management fees that are locked in. And when we invest into the GP, we own everything.

5:17Deirdre Bolton: We own all their legacy fees. If they're on fund five, we own all the fees going back to fund two or three when they're still charging fees. So that creates that utility-like cash flow stream that we get as a baseline. Then they also generate carry, which we own a share of the carry. And although carry can be more volatile based on markets, over time, the private markets deliver returns. And so you can rely on it over time. Put together a portfolio, you create diversification. So you might have a buyout strategy that's generating a lot of carry and a real estate strategy that's generating less, but on average, it balances out.

5:57Deirdre Bolton: So that carry component is actually very valuable as well. So you're getting access to all these fees and just the growth of the business.

6:06Anthony Maniscalco: Where do LPs bucket GP stakes then? And maybe that's different among institutional investors. Different types of institutional investors have different needs as it relates to what they're looking to accomplish, wealth investors. But how, given you described there's a yield component, there's an equity component, there's diversification component that's a little bit like secondaries in a sense. How do investors bucket GP stakes? And has that been a challenge also for the industry in terms of education?

6:34Deirdre Bolton: Going back to the hedge fund days, it was very difficult because you had a private equity-like vehicle buying stakes in hedge funds. So the investor wouldn't know, should this be in the hedge fund bucket? Should it be in the private equity bucket? That was one of the most challenging aspects of raising capital back then was where does it go? There are other challenges like how do you exit, key person, but the main one actually was where do we put it? Today, there's a lot of different buckets it can go into. One obvious one is growth equity. Because we're a minority investor in high growth businesses.

7:08Deirdre Bolton: And we have really strong protections, but at the end of the day, we don't control the manager. So we're in many ways a growth investor. At the same time, we do come with a very high yield. And so some investors put it into an opportunistic credit bucket. Say, look, this is a yielding asset and I'll put it into that. And maybe I can't redeem tomorrow, but I know I'm going to get a 10 % to 15 % yield on it, which is what I'm targeting. Some investors put it into buyout because the majority of investments we make are with buyout managers. So if you look at portfolio construction, it's spread across private markets, but it tends to be weighted more towards buyout managers as well as private credit and real assets.

7:50Deirdre Bolton: But buyout would be the largest piece of the pie. So it could go into any of those three buckets, really.

7:55Anthony Maniscalco: How much are LPs often doing it to also get exposure to the underlying manager beyond on what they have through a stakes fund. So they then want to become an LP in those funds. Is that, is there also a strategic element or an efficiency element to allocating to a GP stakes firm?

8:12Deirdre Bolton: That's a big part of it. And especially for investors that have a harder time to access certain managers. So for us, we have 13 GPs in our portfolio, and we've been able to get our LPs direct access to all of them. And it's not just to invest. A lot of it is maybe they'll allocate to the fund. Maybe they'll do co-invests with that GP, but it's also just information. So if, for example, an investor is really looking towards what can I learn about the distressed market or what can I learn about the special situations credit market, we have GPs that fit those roles and we'll put them together and they'll share information.

8:51Deirdre Bolton: And there might not be any transaction, but there's information flow. That's the flywheel. From our standpoint, the more we could put our LPs together with our GPs and they could do business together, more that creates value for everybody.

9:05Anthony Maniscalco: Well, I think that gets to a few interesting dynamics of today's current market. So one is tougher fundraising environment. Two is related. You focus on the middle market. So I want to unpack a few things there. One, And we'll get to why the middle market is interesting, why you focus on that. But first, on the point around fundraising, how important is it for middle market managers to want to partner with a stakes firm to be able to get leverage as it relates to their fundraising growth and relationships? Yeah.

9:36Deirdre Bolton: A lot of the reason and the rationale for them to do it, even if they have, and they all have, that we would partner with very strong performance, that's a table stake. They have to be very strong, top quartile, top decile. but certain of them are struggling to raise capital. And where we can come in is our Capital One could help catalyze a larger fundraise. They can increase the size of their own GP commitment into their funds, which is a very strong sign for investors. And then secondly, is they get access to our own resources. And we have on our team, seven capital formation professionals that work directly with our GPs.

10:13Deirdre Bolton: And we built that team out, not broadly, so they cover every part of the world or every type of investor, but where do middle market GPs have less exposure? Areas like the Middle East, areas like insurance, wealth, consultants. So we've built out value propositions around all those areas so we can help. Part of what we do when we're getting to know the GP and doing our diligence and developing a relationship is identify where are those holes. And then before we execute a partnership, we lay out how we want to support them and how we're going to help them raise capital. And we want them to agree and be self-aware that they need that and they're open to that.

10:55Anthony Maniscalco: How do you underwrite whether or not a GP is ready to go on the growth journey with a stakes firm? Once they choose to take in capital, they're taking in a growth investor. Yeah, yeah. It means they have to say, we are going to grow. And it's clear you can help them given what you just shared, as well as other ways that you help them with your platform. But what do you look for to make sure that a manager is ready to actually grow and scale as a firm?

11:25Deirdre Bolton: One, as part of our diligence, we have to believe that they have the capacity to grow in their strategy. So we do an analysis of what's the size of the market. And as they grow, can they retain their performance? persistence is critical. And so we do a lot of diligence around that and what they do. And then secondly, they have to be at a stage where there is a growth plan, meaning it could be as simple as we want to take our third fund from$800 ,000 to$1 ,200 ,000 for our fourth fund and walk us through how you're going to get there. Who are your existing LPs? Are they willing to grow? How do you expand?

12:04Deirdre Bolton: So there's got to be either a growth case there or a growth case around expanding their product set. It could be a GP that's in an area like credit where there's a lot of adjacencies and they have to have a plan around that. But our capital, one of the things that's critical is 80 % of our deals are primary capital. And what that means is it goes under their balance sheet and is used to fund investments into their existing flagship funds or new products. It's not taken out of the system.

12:30Anthony Maniscalco: So where my mind goes with that is, why would the GP take on such an expensive form of capital? Giving up equity in their business is a big deal on a number of levels, but it's also the most expensive way in which they could finance their business or maybe even their GP commit.

12:49Deirdre Bolton: It's really driven by the fact that if you put yourself in their shoes, they're selling 10 % to 20%. They still own 80 % to 90%. And if they believe that you're going to actually help them grow, help them expand. And it's not just growing their business, it's professionalizing them. We have resources around generative AI, cybersecurity, talent, comp. We have resources around all that. If they believe you're going to create value there, then they're not going to nickel and dime the price because they know you're going to add more value on their 80 to 90 % than they own today. And one of the things that nearly all of our GPs will do before they enter into a transaction is talk to our other GPs and understand, have they actually done what they said they're going to do?

13:33Deirdre Bolton: Have they delivered? Have they performed? And the answers come back positive. And so we're able to get transactions done bilaterally, no bankers in many cases, direct with the GP because they really are comfortable that we're going to drive value. That doesn't mean that they won't consider a preferred or debt, and it doesn't make them mutually exclusive. Several of our GPs have preferreds in their capital structure and have sold equity.

14:00Anthony Maniscalco: Generally after they've done preferreds. Before and after.

14:06Deirdre Bolton: Before and after.

14:07Anthony Maniscalco: And a couple of them have raised debt as well, post our acquisition. So at this moment in time, capital raising is getting harder for many GPs at all. There's this barbelling of the industry in terms of needing scale or needing to be really specialized in niche. The middle is a bit harder. You focus on the middle market and I imagine there's either an imperative for those firms to grow against more challenging fundraising environments. There's not new pension funds being created or not many new endowments being created, but there's a lot of private wealth being created and you need the scale to be able to do that.

14:46Anthony Maniscalco: how much do you think firms are thinking about gp stakes as a way to retain talent and think about that next generation because if we roll out the string like private wealth is probably going to be a bigger part of the private markets ecosystem as it relates to the capital raising side of things and firms are going to need to equitize their younger partners or younger standout team members so that those people don't leave so how does gp stakes factor into all of that at this moment in time?

15:15Deirdre Bolton: So in many cases, our deals involve a component where we actually provide capital to that next generation so they can put money in to the underlying funds themselves. And that creates retention mechanisms on those people. So we spent a lot of time in the deal, on the deal side, understanding what does that next generation look like? How equitized are they? How much carry do they have? How much incentives do they have? What's the history of turnover? and we focus on making sure that that's solid. That's very important in our deals. On the wealth side, which is where many of these firms, even middle market firms are raising capital, it might not be with the largest platforms, but it's with the growing RIA channels or other channels where there's a lot of flow.

16:01Deirdre Bolton: And those groups are looking for nice returns, alpha. They might not want to invest in the large cap space. So we spent a lot of time and we've invested resources into people that can support our GPs around wealth. And so that's also part of the plan is, do they have a strategy that is attractive to the wealth channel? And that goes into our factoring of whether we want to partner with them.

16:24Anthony Maniscalco: Have you underwrite the middle market managers, particularly as relates to your last question of what strategies are interesting to the wealth channel and what strategies, presumably, the corollary comment is that they can scale. So how do you underwrite the middle market and are there specific strategies or sub-strategies that are more attractive for a GP stakes investor than others?

16:46Deirdre Bolton: There's not one size fits all. So it could be one of our GPs that has a flagship that is scaling tremendously. So we have one GP in our last fund that has gone from when we invested two years ago, they had 7 billion of AUM. Today, they're at 16 billion of AUM. And it's all been through their flagship fund growth. So they have a scalable strategy. It's attractive to institutional investors and wealth. They have a lot of RAs already. We can help them there a little bit, but really actually where we're helping them is expanding beyond North America. So despite the fact they've gone from seven to 16, very large portion of their client base is North America.

17:24Deirdre Bolton: And so that's how we set that one up. We have another GP that is more of a, I'd say almost a satellite product business where they have a lot of interesting specialty finance businesses. We're helping them with those, giving them advice on those, and then helping them raise capital. And that's actually very interesting to the wealth channel because a lot of those investors are looking for uncorrelated specialty finance type businesses that are generating nice returns, but also a nice yield. If they can be structured tax efficiently, that's really attractive to the wealth market. So there it's much more of a focus on, do we think, and we will lean on our, we have a team, again, that helps these GBs raise capital.

18:04Deirdre Bolton: They're as equally involved in our diligence because to your point, we need their buy-in and we need them to communicate to us that they can raise capital for them or that their strategy should be attractive to that market. So it's not one size fits all. It's really identifying where's the growth opportunity and how can we assess it?

18:23Anthony Maniscalco: How does that relate to how you think about portfolio construction within a GP stakes fund?

18:27Deirdre Bolton: When we go into each fund, we set out at a very high level, where do we want to invest? What parts of the market do we think are attractive? And where are we more concerned? Where are the red flags? So we set that up. And then within those different buckets where we're focused, then we go a layer deeper. We say within that, within buyout, for example, and I'll use that as an example. Today, where do you want to invest in buyout? Our view is you want either very deep value-oriented investors that have large teams to support their portfolio companies. They buy companies at low multiples. They support them.

19:01Deirdre Bolton: They drive profitability, sell them at higher multiples. That's a good business model today. And there's a lot of money flowing in that direction because of what's happening. The other area is deep sector specialists, where it might be food. It could be financial services. It could be tech, but where they're generating a lot of alpha and they have fundraising success. So as part of all this, we're looking at where's their good return opportunities for their underlying strategies and where's their actually capital flowing. Might be the greatest strategy of all time, but if investors aren't investing in that type of a strategy, it's downside for us.

19:35Deirdre Bolton: It's not upside.

19:36Anthony Maniscalco: Is there a strategy within private markets that's harder or a little more challenging to wrap your head around from a GP stakes investment perspective?

19:44Deirdre Bolton: Yeah. Look, from our standpoint, venture is more difficult. And the reason for that is twofold. One is we don't, and some GP staking platforms may have, but we don't have the skill set to underwrite their portfolio companies. We can't look at SpaceX and say it's worth X or Peloton. It's just not in our skill set. So hard for us to underwrite the portfolio companies. And when we buy GPs, we don't just do desktop diligence on the profits and we go deep. We go into every portfolio company. We have members of our team that have deep experience around direct buyout investing, direct infrastructure investing.

20:21Deirdre Bolton: And we leverage that to come up with our own view on where are they going to exit the position? When are they going to exit it? Come up with a view there. And in certain sectors like spaces like venture, you know, they're saying they're going to exit it eight times. And we don't know if it's four times or 12 times. So that's hard. The other thing with venture, just as a nuance, is many venture capital firms don't have a management company. They have management companies at each of the funds. So there's no centralized business to acquire, if you will. They'd have to restructure, which makes it more difficult.

20:54Anthony Maniscalco: What is the hardest part about investing in the middle market today from a stakes perspective, as you think about it? And that could be middle market and private equity and credit and infrastructure, wherever you're seeing and getting exposure to managers.

21:08Deirdre Bolton: I think at the end of the day, it's, is it a scalable business? Is the market opportunity big enough? And importantly, can they maintain returns? If they grow, can they maintain returns? Because you can look at a case study where a GP is consistent, they raise seven funds, and every fund has strong returns. When you're investing earlier, you need to come up with that judgment on your own, whether they're going to be able to sustain that. And so that's a big part of it.

21:34Anthony Maniscalco: So on that point, I love asking this question to allocators. I think that the same is true of asking it to a stakes investor because you have to underwrite the cash flows and the carry streams and the firm's investment prowess. What do you think constitutes a manager's edge?

21:51Deirdre Bolton: I think they have to have something where they're driving real value in their investments. I think that's the most important edge in terms of do they have a team within buyout? Do they have a team to drive cost down? Do they have people that are on staff that have experience doing it? Are they proven? That's an area of edge. Edge could be in sourcing. One of our GPs that's in secondaries, they're outstanding at sourcing opportunities. They're buying LP positions at massive discounts. They've shown that they're consistent. So they have a sourcing edge. There's got to be a real edge that's sustainable.

22:28Deirdre Bolton: And our job is to identify whether it's sustainable or not. And again, if they were in their second fund, it'd be very difficult. One of the reasons why when we stake investors and buy equity, our model is we would rarely invest before fund three. Meaning they've got to be on fund three or later. And that's really because we need to understand, are they profitable? Because we're promising a yield to our investors, so they've got to be profitable. Have they had realizations? So is it real performance, not just marks? And lastly, what's their identity? Do they have an identity? Do they have edge?

23:02Deirdre Bolton: What's their edge? So that's important. They don't need to be the best fundraisers yet. They have to have a solid client base. But that's an area where if they do have that edge, we can come in, we can help them. In many cases, we clean up marketing materials, we clean up presentations, we coach them on how they present, and we help them raise the capital, obviously.

23:23Anthony Maniscalco: On that point, how far in the evolution are many of these firms and their executives and teams in the process of evolving from fund to firm? At that point, are they generally a firm or are some of these firms that you're talking to in the middle market, are they still more of a fund that needs to figure out how to really evolve into a business?

23:46Deirdre Bolton: Some of them are in between, meaning most of them have made great strides, not all of them. It doesn't mean when we go in, we do our diligence, we identify the CFO is started with you from day zero. oh, it was your friend from college, you need a new CFO or a new COO, or we think your back office is subpar, not to a point where it's a major red flag, but it could be upgraded. And those are situations where we have resources to go in and support them. Again, though, we don't have control. So if we go in there and we say, we communicate that and they say, you know, no, that's not right. That's a red flag.

24:24Deirdre Bolton: That means they're not aware of their problems and they're not going to change. And we would not invest in that situation. But many of them are firms, but some of them are in between.

24:34Anthony Maniscalco: How do you think about where the industry is headed as you think about your portfolio? One of the questions in GP Stakes, not specific to your portfolio, but I'm sure you're thinking about this because as an investor, you need to think about exits and liquidity. One of the questions of GP Stakes in industry is the liquidity question. Now, vehicles have either been structured or messaged in ways to LPs where they are expected or anticipated to hold these for long periods of time. Many of the LPs also have the right pool of capital or right construct to be able to hold those positions for a long time.

25:14Anthony Maniscalco: Absolutely. As the stake space matures, though, liquidity does seem to be a question. How do you think about, one, the evolution of liquidity? And two, as it relates to the middle market, and maybe this is some of the dynamics around some of the industry trends, what's going on in asset management. What are the liquidity paths and exit?

25:35Deirdre Bolton: The way we think about it is there's liquidity at the fund level and there's liquidity at the deal level. And for us, when we go into each investment, we have to have a convicted view on who's ultimately going to buy that position for us. We are not permanent. We're not short-term. We have a very long-dated fund, and our intention is to work with the GPs for seven, eight, nine years, create as much value as we can. But at some point, what we do for them is going to become more exhausted, and they're going to want somebody else to own that equity. It could be themselves. They might want to buy it back, and there's ways that they can either come up with the capital, finance it through the prep market, through the debt market, or through their own liquidity.

26:16Deirdre Bolton: So that's one option. Another option for us is we have the ability after a certain period of time to sell to one of the larger stake buyers in our space or to an insurance company, a sovereign wealth fund. Now, in practice, what we're going to do is we're going to sit with management. We're going to say, look, who do you want to own this equity? And let's go find that buyer together. Or that GP may say, I want to sell control. And that is a big area of liquidity in our market right now where a lot of the strategics, it could be alternative asset managers. It could be traditional, it could be insurance companies where they want access to our feedstock.

26:51Deirdre Bolton: And we had one investment already out of our fund, one that was sold in whole to a large strategic. Two of our positions had partial realizations, and those are all to strategic buyers. So those are the paths of full exits. At the end of the day, though, we're looking for other ways to get capital back quicker. So there's been a lot of bond offerings in our space. our individual investments are not levered, but the fund is highly leverageable. So this is at the fund level, we can issue a bond and distribute that all back. Now, our model is, again, it's not perpetual. We have a finite life and our job is to really figure out what's the best way of optimizing that liquidity at the deal level and at the fund level for our investors.

27:34Anthony Maniscalco: You mentioned PREFs and debt. Those are strategies that seem to be increasingly growing within the state space. There are increasing number of funds that are being raised in those categories. How do you think that will impact the evolution of GP stakes as an industry?

27:54Deirdre Bolton: Yeah, that's not new. There's a perception that preps are new. Preps have been around for five years. Some GPs want to go down that route. And that's a route where you get capital. It's non-dilutive, but you don't get any value or very limited value from the buyer because there's limited upside in that investment. Whereas in debt, it's even less so. It's even less upside. At the end of the day, those are ultimately ways of actually taking out our stakes longer term. So that's one option. But our view is, look, we're over time, we're going to evolve. And we view our sourcing funnel as it could be a stake, it could be a preferred, it could be debt.

28:34Deirdre Bolton: And it's really identifying with the GP what's the best solution for them. Now, the reason why they may choose equity is because they're only selling 10 to 20%. They still own 80 to 90%. And so if they believe that we can actually deliver a lot of value on that 80 to 90%, it's worth it for them. And we see that. Obviously, we're still executing deals, do two to three deals a year, and they're selling equity. But again, over time, we're also likely to evolve to a point where we have multiple solutions beyond just GP staking.

29:09Anthony Maniscalco: So if we take that point, there's multiple options within the GP stakes market that LPs can access if they want exposure to this trend. As you put it, I thought it was a great way to put it. It's like, how do you get exposure to this secular trend of alternative asset management industry growing? How should the wealth channel think about GP stakes? If there are investors who have not had as much exposure to private markets, is GP stakes, well, there's a lot of complexities and nuances to it that I think are becoming more understood in the market, which is good. There's a lot of education going on.

29:44Anthony Maniscalco: All of that, I think, is really important. But is this the type of thing where it has diversification? You get exposure to a lot of managers, a lot of funds that managers have. A lot of strategies. A lot of strategies, a lot of vintages. And you get a few different flavors of return streams and wrapped in one single ticket. Is this something that investors who haven't had as much exposure to private markets and they're coming in today, T-Zero, does it make sense for them to start with stakes?

30:12Deirdre Bolton: Yeah, it's one of the most downside protected way of investing into the private markets. Because when we invest, we're getting immediate cashflow. If you invest in a buyout fund, which buyout funds are great, but you're not going to see realizations for five, six, seven years, They're going to draw capital and then they're going to start returning capital. So our strategy returns capital within six months, creates more downside protection. Some investors look at it as this is a great yield. That's tax efficient. Some investors look at it as I had the chance of getting my money back just from distributions in six to seven years.

30:46Deirdre Bolton: So that's one of the benefits of this strategy. The other benefit is you still maintain the upside. Unlike private credit where you have a fixed return or prefs. here you still own the upside of the business. If the business can triple its assets, that's a 3x plus and more when you include the distributions you've gotten. So I think the investor has to look at it as, yes, it's a way of getting highly diversified access to the private markets across all the different food groups of the private markets and doing that in a way where you still maintain a lot of upside, but you have downside protected through, again, the management fees that we discussed at the beginning.

31:25What is something within GP Stakes that is

31:31Anthony Maniscalco: less well understood in your mind, but is really important to know?

31:36Deirdre Bolton: I think it's really, really critical that you have alignment with the principles. And I talked about our use of proceeds, meaning we're not in the middle market. I think it's not appropriate to cash people out. Meaning these aren't trades where they're going using the cash to buy a sports team or buy a boat, this is where they're putting it back in. They're doubling down. They're selling equity and they're pouring that back into their business. I think that's really important for people to understand because some deals that we haven't worked on are cashing people out and those don't go well. Because to your point earlier, you don't want any one that's bad from an alignment standpoint with the principles, but it's even worse from the next generation.

32:18Deirdre Bolton: If the next generation sees the managing partners that own the equity take a bunch of money off the table and then start doing other things, that just creates a lot of instability. So people is the most important thing and alignment and the deal alignment is equally important.

32:35Anthony Maniscalco: I think that's such an important point. It's a cash in, not a cash out. It's a cash out, which a lot of people may miss when thinking about stakes. On that point too, have LPs, and maybe this is a more institutionally oriented question in that context of have LPs begun to change their view about stakes? At one point, many LPs thought stakes mean that, okay, this manager is cashing out, but if it's not a cash out and it's a cash in, do LPs now view the inclusion of GP stakes and what a manager is doing as different than they did in past?

33:11Deirdre Bolton: It's definitely evolved in a positive way where we can actually show investors the numbers that the exposure of the principals to the performance of their funds post-sale goes up materially. So they think it creates misalignment, it creates bad acting, but actually this results in more alignment and more exposure to performance.

33:34Anthony Maniscalco: So on that point, have you been able to cut the data and see when firms take stakes versus when they haven't, does performance actually stay the same or improve or does it decrease? And now, maybe that's not entirely perfect or fair because fund size may increase too.

33:49Deirdre Bolton: So yeah, challenges, markets are different now, returns are lower in many cases. And so you've got other factors that would go into that. But interestingly, going back to hedge funds, when I was doing this as a banker at Lehman and Barclays, we did a study with performance. We looked at pre-sale and post-sale and post-sale performance either stayed the same or got better in 80 % of the cases. And again, because the money went back in, there's more skin in the game, more alignment with performance of the funds, which again is counterintuitive, but it's actually how the math works.

34:22Anthony Maniscalco: I think that's such an interesting point to take away because there's so many, I think, thoughts about stakes and what it means, but actually seeing what is actually happening at the level of making the investments.

34:33Deirdre Bolton: These are businesses. So at the end of the day, if their LP says to a GP, I want your fund size to stay flat. I don't want you to ever grow. and I want you just to manage that amount of money. People are not going to stay. So that creates a lot of fragility in the business. So having at least a growth path and having a path for that next generation to take on more responsibility and create wealth, that's what keeps a business growing and afloat.

34:57Anthony Maniscalco: So I think that's a great transition to looking at something that might actually be happening faster than you might think and maybe slower than you might think. What are you seeing that is happening faster than one might think or that has surprised you in the stake space and something that on the reverse is slower?

35:18Deirdre Bolton: I think on the slower side is it's still very hard to there's a perception that this is becoming an incredibly crowded market. Everybody's getting in it. That's not the case. First-time funds are incredibly hard to raise anywhere, and especially in a strategy that's still a little bit nascent and not as obvious as you will. It's not buyout. It's not private credit, et cetera. So I think there's slower than you might have expected our new entrance.

35:44Anthony Maniscalco: On that point, I think it's worth unpacking. I don't mean to interrupt, but I think it's an important point to unpack is many people look at the top end of the stakes market, and there are large deals done, right? Blue Owl has done, I think, 87 % of the$600 million plus deals.

35:59Deirdre Bolton: Yes.

36:00Anthony Maniscalco: And there's actually only a finite amount of firms to actually work with. And in some cases, those firms will do multiple deals with the large stakes players.

36:10Deirdre Bolton: In the mid and lower end of the market, how many GPs are there?

36:14Anthony Maniscalco: And then how many have actually taken stakes?

36:16Deirdre Bolton: Yeah. So we estimate there's within our TAM, which is 1 to 10 billion AUM across the private markets, excluding venture, excluding certain strategies that we wouldn't invest in, there's over a thousand GPs. And there's, call it roughly 15 % of them have sold stakes or even maybe a little less than that. So the TAM or the addressable market is, it's north of 700 GPs. Now you've got to dissect that further. They're not all top quartile. So that goes into the equation, but it's still the opportunity set is massive right now. And to your point on need or desire for capital, that's never been higher than it is right now, given the markets.

36:57Deirdre Bolton: It's not really about deploying capital or being able to, it's really about making the right investments and making sure that you're investing into the top quartile managers. And that importantly, that they're in a part of the market where there's positive flows, not negative flows. And lastly, which I mentioned, and I don't want to use the word too often, but alignment, The transaction is aligned. We're not, again, we're not creating anything where they're taking money off the table, if you will.

37:21Anthony Maniscalco: So I didn't mean to interrupt the flow of what the fastest or something that was happening faster than you might think.

37:27Deirdre Bolton: I think your point on the evolution of solutions, I think that's happening pretty fast in that there are different solutions on the investment side, preferreds, debt, but also on the secondary side, meaning there's a lot more ways of actually getting liquidity. Some of the groups have done strip sales where instead of selling LP shares, they'll find a buyer for 5 % of every position. They might sell that to somebody. They might sell that into a continuation vehicle. Those trends are happening. One of the actual benefits as a stake buyer is although M &A is slower, it's been rapidly replaced by continuation vehicles, single and multi-asset.

38:08Deirdre Bolton: And that's very positive as an investor because when they generate carry, management has to roll that into their funds as their GP commitment. But investors don't care if we take the carry. So when our GPs do CVs, we'll take the carry. We'll take the cash. And they reset their management fees on those assets, which we get our share of again. So it's almost as good as raising fresh capital because we benefit from the carry that's generated and from the fact that we're generating management fees. That trend is happening very quickly.

38:41Anthony Maniscalco: So just to tie a few things together, the GP-led CV market is now roughly the same size as the LP-led secondaries market. Yes. So how do you see the growth of that? It's interesting. Most people look at the secondaries market and see the explosion of growth in CVs as being massive for the secondaries market. but there's a knock-on effect to the GP stake space, which I'd love for you to just touch on in a slightly deeper way, where in your view, how much do you think the CV market will impact stakes investing and the ability to generate more fee-paying AUM of some sort, and exit liquidity on the carry, but then fee-paying AUM on the management fees of GP leads?

39:26Anthony Maniscalco: Because that gets, I think, get some interesting dynamics in the middle market where maybe those firms in the middle market actually can hold on to these assets as opposed to sell to the next private equity firm in line.

39:38Deirdre Bolton: I think it's a trend that one, it definitely benefits us in terms of, again, our economics that we earn off of those transactions. It's also a business where we want to ourselves find ways to support our GPs. So we ourselves are thinking about ways of of maybe dipping our toe into that market, not as a way of building a standalone GP-led business, but when one of our GPs comes to us, we're always trying to come up with how can we help them? How can we create a solution? And if we can say, well, if you're going to launch a CV, you can count us in for 25 to 50, because remember, going back to how we underwrite the GPs, we underwrite every portfolio company.

40:19Deirdre Bolton: So we've already done diligence on the portfolio companies that they might put in to the CV. So we're really well positioned to invest into that CV because we've underwritten that asset already. And if we can help create that, not exit, but that extension, then that helps our GPs and helps us. At some point, I think it's going to be interesting that when the M &A market does come back more actively, what does happen to the CV market? Because it's really right now just an alternative to selling. There's still going to be assets that the GP says, I just don't want to sell it. I want to hold this for another 10 years because there's a lot of value creation.

40:56Deirdre Bolton: But the CV market helping out some of the slowdown in M &A, that's going to counterbalance over time.

41:02Anthony Maniscalco: I think that's such a fascinating way to wrap this all up because I think we went from 18 years in the industry, you were working on the hedge fund side and stakes because that was what the industry was doing. To now talking about the nuance of CVs and GP leads as it relates to what that might mean for GP stakes. And so we've come a long way in 18 years, but yet, as you said, there's still so much room to run. Yes. And it's still a relatively small industry with plenty of room to grow. Plenty of. So it's a great conversation. Thanks so much, Anthony.

41:33Deirdre Bolton: Thank you very much. Really appreciate it. Thank you.