E302 | EUVC | The deep dive on Isomer's 100M€ Secondaries Fund with Joe Schorge and Omalade Adebisi

0:00Welcome back to another episode of the European VC podcast. I am so excited for today because we're going to be talking about Ismer Capital's fresh new secondaries fund, which is 100 million euros. And it's going to be targeting secondary LP stakes with 60 to 75 % of the capital, 15 to 25 % is going to go to secondary direct opportunities. And then there's a small bucket for other opportunities like GP stakes. So everyone, you're in for a great episode. I'm joined by Joe Schwartz, the founding GP of Ismer Capital, who you know, We've had on the podcast a million times as David and I are also VPs with Icemer Capital.

0:38And then we are also announcing for the first time a lot of a busy principal of ice at Icemer Capital on the podcast. So super excited about that. As always, this is going to be a great episode, I hope. And it's going to be spicy as well, I think, because we're going to look at the deck that raised the fund. So maybe not make major surprises there. We're not going to disclose anything that you're not allowed to hear, but you're definitely going to get an overview of the secondaries market in Europe and how probably some of the best think about it in the market. I really hope you'll enjoy this episode.

1:15And if you do, please drop us a review and follow us on EU.EC. Here's a few words from our beloved sponsor. Welcome to a special episode of our podcast, proudly brought to you by Zero 100 Conferences. Join us for a unique networking opportunity like no other at the 0100 Conference CEE. This exciting event is set to unfold in the historic city of Prague from May 14th to May 16th at the luxurious Hotel NH Collection Prague, Carlo IV. Connect with leading names in private equity and venture capital, including Schroder's Capital, EIC Fund, EIF, EBRD, PFR Ventures, Early Bird, 500 Global and World Fund, amongst many others.

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2:37It's more than just an ally. This is a union of values. United and determined we can serve as a model for other regions of the world. The nature of a problem requires a European response. Europe is a story of new beginnings, new, new beginnings. Let's start acting, acting, acting, acting. This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. So, Jo and Umelare, welcome to the European VC podcast for the umpteenth time, Jo, and to you, Umelare, Esther, first time. Thanks, what a pleasure to be back. Well, first time from Eva. I'm super excited.

3:22I've had great days. I've watched so many, many videos of you guys. So I'm pretty happy to be here. You're making us blush. And don't kill us with your excitement, Joe. You sounded very excited there. Or you do have something very exciting to say, because just yesterday dropped and sifted that Icemer is ready with the Secondary Fund. Yes, indeed. We've been cooking it up for a long time. And despite what you may think, I am super excited about it. I'm super excited to introduce also Omelade, who's key to the strategy. This for me felt like, what is it? You know what you're like? I'm Nigerian. And there is something that we're always thinking about, which is this hustler lifestyle.

4:07And no matter how much a high profile job you have, there's still always something on many minds. And for me, it was always that building something, growing something. And I always had this corporate job. And I went to the, I was at Collar doing secondaries. I went to then the Middle East to launch the first visit secondaries. And Joe found me. I don't know how. That's a long story for another day. But here I am. And we are so excited because yesterday it was formally announced that we have a fund, which we are quickly deploying. Joe is the master of finding the best people. Well, I can't take credit, so let's be really fair.

4:56We have to give a shout out to Harry, Harry Glacier on our team, who ran a wonderful process. We had a lot of great people apply. We had more than 240 people apply because what we said was we've always been doing secondaries at Isomer. It's part of our strategy from the beginning. This doesn't come out of nowhere. But now with the explosion of the market, now is the right time to increase our activity and launch this dedicated fund. And so we need more skills, more brain power, more hands. And so I got to give it to Harry for really running a beautiful process that resulted in Omelade joining our firm.

5:42So I, you know, credit where credit is due. I had some hand in it and I'm absolutely loving working with Omelade, but we got to give Harry that. Find his credit stories. No, but Joe is right though. The Harry relationship is a weird one because I had actually met Harry before. We had a meeting before where he paid for my breakfast because he was sitting on the side of the pit. So when the Isomer came and I met him, I was like, I know you. So we know each other. And that was the glue, I have to say. It wasn't the process. It was two things. It was the Isomer platform where I felt that this strategy for this type of firm is right and the timing is right.

6:27And then it was also the relationship that I had with Ari. And I'm here. And I think so far, it's been pretty perfect. Well, to just comment on that, we were really looking for something quite specific, right? There's a lot of people in the world who have done secondaries by now. The private equity secondary market is big. And you work for one of the biggest firms. I work for one of the biggest, oldest firms as well. But we also have a second aspect to our culture, which is we're fanatics about venture capital and tech. And so to find that, you know, can I say an odd person in the market who has a skill, has an experience in secondary, but then also shares this, you know, there's nothing more than addiction, fascination, love for venture.

7:19So that's, you know, what we found with Omelade and we're really excited. She joined the firm last year and we were putting this new fund together quietly. We wanted to build it before going out and talking about it. So that's part of why it's really exciting to talk about it now because it's up and running. We have far too many deals. We could invest it all this afternoon if we really wanted to. But that's a good position to be in. So big shout out to Harry and welcome, Amaladi, on the show. Super nice to have you. Joe, you said something about the market is booming. Can you unpack that? And obviously, we're talking now from a secondaries perspective.

8:00I'd love to hear you unpack that kind of as a way to segue us into why the hell is Isomer pursuing this versus the 10 other opportunities that are out there right now. Yeah. Well, maybe I give the theoretical top level and I know, Maradi, you could give some examples of what we've been kind of seeing lately. So as you know, the idea with Isomer is to be a really good partner to the funds and companies we invest in. And part of that strategy from the very beginning was to say, well, if a fellow LP needed or wanted to leave a fund, we could buy that position. Or if a founder wanted to take some risk off the table or needed some cash for something else or whatever, we'd be open to that.

8:48And so that's kind of how we've been doing secondaries for about eight years now. But of course, what's happened in Europe over the last decade is growth on growth on growth, this compounding of growth. So we arrived here in 2024 with the largest stock, if you will, of tech companies in Europe that we've ever had. And I mean private venture capital-backed tech companies. We've never had so many by number or by value in the market. And to put a number on that, there's been about$300 billion invested over the last five years. So this creates this large volume of assets. And on the same moment, we really don't have many liquidity providers for this.

9:37On the big end, you have the large secondary funds like we used to work at, but they're really not able to discover or find the early stage tech assets. So you have this kind of supply-demand imbalance. And there's a top-down point of view of those numbers I've just described. But there's also a bottom-up point of view, which is simply what we're experiencing in the last six months is every time we mention to one of our VC partners or even other VCs we know in the market, hey, we're going to expand our secondary program. Literally, there's a one-to-one where they come back and go, oh, oh, if you're buying, I have an interesting idea for you.

10:17I have a, you know. So I don't know, Omelari, is that consistent with what you've been working on and seeing lately? You can see my face. I'm getting excited because whenever Joe goes to a meeting, I get an email. There's something that says there's a deal. The meeting has nothing to do with secondaries, by the way. Joe goes to any meeting and something comes in. Chloe got outside a meeting, Freddie, me. So it's interesting because, as Jill said, Isoma has always done secondaries, right? But it's been a thing of the deals were coming to them, right? And they literally saw that there are so many deals coming to us.

10:57The flagship funds have a quota of how much they can do. So what do we do to actually take more of this market? And I come in from a different, you know, from a different part of the ecosystem. system. And here we have, before we even launch this fund, we sit in a meeting, we have a conversation. We mention the word secondary, something comes up. There is opportunities left and right, and it is amazing. And just to put it in perspective, I, like in my previous job, we knew who all the players were. I mean, Joe, are you old players as well? Every deal you do, every deal you take to IC, we're talking about who are the other people competing for these deals.

11:39Who else is bidding? Yeah, who else is bidding? You know, you spend part of your memo talking about bidding strategy, and you think about your pricing in terms of who else is coming to also submit a bid. Whereas here, we are creating it. Like, it couldn't get more exciting than that. We are, this, we have a conversation, this is a story. I go to a meeting, Joe goes to a meeting, I go to a meeting, we have a conversation, the next day or the evening before you get home. So the guy's like, oh, by the way, yeah, this comes up. People even tell us that, oh, this is coming up with mine, but also my other friend that you met before also has something.

12:20So you get two deals and nobody else in the market knows about the deal, nor the advisor, nor the nobody else. So you sit with them and you have a conversation and then you build it into something that makes sense. And then you price and you do the deal. So we spend a lot of time actually really thinking about the deal, really thinking about the partnerships we were buying from or the GP that's brought it to us, really thinking about the relationships and what it's that they want to get from it, what sort of type of liquidity, what are we getting from it. That it's all true, it's all honest, it's all based on this one relationship as opposed to, we're not spending time in our memo talking about, you know, deep weird let's do this let's change that no it's all real and it's it's beautiful it's it's very nice i want to i want to follow up with something you said amoladi but before i want to just i want to get something out of the way and it might sound very basic for you secondary lovers but i think it's a good way to also start which is what why is liquidity so important right because we're all connecting this to the lack of liquidity.

13:30Why does that matter? And again, it might sound basic, but I think it's a good way to kind of shoot us into the details. Yeah. Well, I guess if you're operating or considering or doing anything in European venture or even venture more broadly today, the hot topic is DPI, distributions. And that reflects the long-term nature of venture capital, especially strategies like ours where we're investing very early into companies. They don't often have a product yet. They're in the idea stage, the build stage. And so it takes many, many years for them to build the company and eventually sell it. And a lot of investors either don't really understand that long duration or things change meanwhile.

14:23So what you find is that along the way, and we all know that funds are 10-year in duration, but we all also know that they normally extend 11, 12, 13, 14 years. And the reason is that you don't necessarily control the exit as an early-stage investor. You may have some options to exit along the way, but even kind of especially when you have a really great company, you may need to hold for a very long time. So this leaves investors along the way. And now markets change, interest rates change. What we know, unfortunately, over the last years, people's outlook changes. And quite often what you find when someone's wanting to sell, it's not actually about the asset they're selling.

15:09It's more about their position that they could reuse that capital. They could reinvest. They could do other things. So we, as Omolade said, there isn't an intermediary where we're looking at a data. We actually talk to the sellers and say, well, here's how we're thinking about buying what you have. And along the way, normally it comes up somehow, why are you selling? And quite often it's, I have this other project. I want to invest over here. When it's founders, they're buying a house, quite personal stories. And that's really, for me, that's a nice feel-good factor when you're actually helping people.

15:47Think about the founder. This is kind of a European problem. Think about the 20-something or 30-something founder who's built a great company. They may be worth millions on paper, but actually they still live in mom's garage or basement or whatever, right? And so if you can, and this is a historic criticism of European venture that founders are exiting too early because they're taking the prize quicker. And so partly giving them some liquidity, improving their life, buying 10 % of their stake, for example, lets them have more room to build, to stay in the company, to build longer. Maybe they buy the house.

16:29I used to call it our cash for houses program because I think for quite a few years, about sort of four out of five deals, when we would buy founder shares, they would go buy a house. And it was kind of a nice feeling there. But anyway, there's liquidity coming from LPs for that longevity reason. There's founders in order to stay the course and build. Also, people leave companies, right? Ex-employees. So we buy quite a bit to clean up the cap table direct in a company. And even VCs leave their firm sometimes. And we're able to buy the VC commitments. There was some pitch book data in late Q1 this year.

17:11If I remember correctly, it inferred something about us being in a period with historical low distribution rates. Do you see that? Is that something you also see? And does that actually inform the secondary? Yeah, for sure. We feel it as a primary investor. So the exit, you know, more than 2 ,000 underlying portfolio companies. So we're getting exit bit by bit every week, pretty much. But they're much slower now than they were at this time last year, for sure. So that's something where people look to, again, if you have something which has grown quite a lot, you could sell a portion of it and therefore deliver back DPI to your VCs, to your LPs.

18:00Just to add to that, I think for the GPs, it actually is also so beneficial because I think, as Joe mentioned, we deal with the founder thing and we also deal with the LPs, which feels so great. Like my LinkedIn literally says providing liquidity in the European VC space. And I love that because what we do at Isoma is from the top to the bottom, the LPs, the GPs and the founders and the employees also. So the GP aspect, especially as you've just mentioned, distributions have slowed down a lot. IPOs, M &As are taking much longer, which means not because they've invested in bad companies. It's simply just because the market is different now.

18:45The market is slower. And for the really active GPs, which we're seeing a lot of, at least within our portfolio, they want to create also liquidity for their LP, but also when they're fundraising for the next fund. So just because you've finished investing in this fund, the fund is liquidating, but it's taking much longer, and you're now raising a new fund, how do you attract your LPs to invest in that fund? It could be for several reasons. Some LPs love you as a GP. However, they also don't have the liquidity to invest in your new fund as a re-op. So what if there is a solution like us where you buy that stake?

19:25It doesn't have to be the full position. It could be a part position of what they currently own in your existing fund. They can then re-opt and use that same money to invest in your new fund. Same goes to the GP. You know, they can use the secondary market to get liquidity for individual companies. I think, as just mentioned, you have some companies that have just grown and they're so good. So you don't need to sell all of it. You can sell out of it. right and we've also some done transactions at the gp levels as well where you've seen some gps they have a lot of money locked up in the fund and they need to put gp commitment in their new fund how do they do that if they've not made a lot of money a lot of cash in their older fund and the gp itself is good great track record just not enough cash so a lot of it is the market and i really i I feel so proud that we are solving something and providing a solution to, I feel like, a locked up liquidity problem right now in Europe.

20:23I personally like this image that Isara uses of an iceberg, right? With top of the iceberg, easy to see everything that's underneath, which is typically 90 % of the volume of the iceberg, right? It's actually quite hard to find. And Amaladi, you were talking about the fact that, you know, you do a meeting before you get home that day, you have, you know, one or two deals that no one really knows about, which I think speaks to that axis, speaks to that bottom side of the iceberg. So I'd love to ask you, Amaladi, as a new Isomer team member, you know, coming in and you see this kind of special axis here, where does it come from?

21:00Like, how was it created and how do you think you can now help also keep it in the long run? that's a great one actually combination of this it's like this system is piped here right so isoma has been around for a long time almost 10 years now but in that time they've specifically grown a platform that has made a name in the european vc space right if you go to if i mean since i do i'm so amazed when i go to an event and i introduce myself i'm from Isoma. Oh, I know Isoma, really great people. But I'm like, great people is not enough. What else? And they're like, yeah, the partnership is great.

21:40Everybody's good. But they are also so smart. I'm like, okay, now you're talking. We're not just nice, but we also know what we're doing. And that makes me happy that I'm in the right place. But to your question, David, it's literally because the people, they know the market. The market is in the Isoma portfolio. When I say the market is in the Isoma portfolio. It means that Isoma is already invested in most of the CBCs in Europe. And also, basically, we have commitment or at least GP relationships all across. So think about the Nordics, think about Estonia, think about Southern Europe, UK, wherever you can think of.

22:20The Isoma name is a strong one. So therefore, a lot of these deals are actually coming from the partner. Like I'm working on two, probably five days right now, but the two top ones on my list, one of them came from a portfolio GP that we have, but introducing us to another friend of theirs that is not yet in our portfolio. And then the other one came from a conference. So it's really, people know Isoma, and therefore they are happy that we will be a good partner in such secondary organisations. So that's really where the deal comes from. Then the number two is, what am I thinking when these things come?

23:01So I think my first few months, even though I'm like, I'm super excited about venture, I've been bitten by this crazy bug and now I'm in it. But the truth is, the deals I did previously were very different. So the team have obviously spent a lot of time and effort also getting me into this VC space, especially thinking, because when I see deals, 0.3 dpi what is going on this is a 10 year old spot and joe tells me you get it you get it you get it um now i think i get it i'm still learning but i get it a lot um but yeah so usually the deals are coming from as a result of just the strong platform dysomar as um a lot of relationships in and out.

23:49So there are GPs that are not in our portfolio, but we've had conversations with them all through the years. We like them. They like us. We might not be able to invest in them for one reason or the other, but we remain close to them. So from various sources. I was going to give an illustration. So one of the, perhaps the deal we will close next arose exactly as you described, which is, it's a group I've known for about 10 years and we were just catching up, always liked the guys for different reasons. We never invested in their funds, but always kept a nice relationship. And we were just doing one of those general catch-ups.

24:30And I said, oh, by the way, we're going to expand our secondary work over time. And they said, oh, well, we might have something really interesting. And it ties together a lot of what you said, Omelade. Oh, it's our first fund. We're raising our fourth fund. and if some people would get liquidity out of one, they might put money in four. And so would you look at it? So we, yeah, happy to look at it. So we started to look at it. We realized another trend, which is the pre-IPO companies. So the star company is a terrific, the jewel of the crown, I would call it in this particular fund. Company that moved to the US is preparing for IPO.

25:12but it's unclear to all of us, is that IPO window going to open in 25 or 26 or 27? We're all very hopeful that it opens in the second half of this year and we get lots of liquidity, but we don't know. So the bet we've taken a few times lately is to buy into this late stage, profitable, large, very successful company that's already running bank processes, already pre-IPO. But it's very hard to know, is that a one-year hold or two-year or three-year? We don't know. We don't know. But we think it's a pretty nice bet to buy into these late-stage companies, which we can DD, which we still have a close relationship to through these groups.

25:56And so, yeah, that's the kind of the million-dollar question, as they say. When is this IPO going to happen? We don't quite know. But if you're buying in today, you can afford to wait two or three years. Could I maybe ask that we pull up some slides because we have the privilege of showing some of your deck. And I think that there are some market slides because now we've been talking about it on the big and the small. But if we just go to the broad scope here and I will share my screen. And I wanted to maybe say if you just talk us through the first slide here, slide number two, Joe. So would you, or Omelada, feel free to go whoever wants.

26:42If you just tell us the story that you've just told us in 20 minutes, but tell it in a very, you know, how do you put it, like a teacher would to a pupil. Tell us what's the state of the market like. And then start on page two, and then we'll go through them. All right, let's do this very quickly. So as the squares say, we've had 12 years of compounding growth in Europe, which is wonderful. We've been a primary investor into that ourselves. There's been 300 billion that's gone in over the last five years, about 3 ,000 VC firms created in the last decade, and about 350 unicorns. We have about 32 of those unicorns in our own portfolios.

27:26So this is a wonderful growth landscape. That's the good news. The difficulty is there are not liquidity providers, as there are quite a few in the US. They're not there in Europe. So as you're seeing in the next stage, one way to think about the secondary market is if you have a, secondaries are different than primaries in the sense you can only buy something that already exists. So you already know before you even go out for your first deal, you already know there's a group of assets there. That's what's available to buy. So let's just say that's this 300 billion that's gone out. If something like 3 % to 5 % of that seeks exit in a given year, you're talking about$9 to$15 billion of assets looking to be sold in a given year.

28:17Some will sell, some won't. But within a deal flow of$9 to$15 billion, we're looking to deploy$100 million. Just to put that So we really are a drop in the bucket, and we really can select the kind of exciting high-growth assets that we'd like to buy into. So that's the big market landscape. And this slide, I'll start it, and I'll probably can finish it. This comes a little bit out of Isomer's experience of looking for the bottom half of the iceberg in everything we do. But actually, I worked for Pomona Capital before starting Isomer. And the founder of Pomona is one of the pioneers of secondaries.

29:04And I used to love to travel with him and hear him tell stories about those very early days in the early 90s when all the name brand firms were getting started. And, you know, what he what he would say is that it wasn't a market. It was just it wasn't a secondaries market. There were just a few odd deals. There were very few players, there were almost no funds, there were five funds in the early 90s. And it wasn't so much a market as we know it today as I found a very strange deal. I found a special situation, somebody owning an asset that doesn't want to own it, and let's try to figure out how to buy it.