E380 | Alberto Chalon, Giano Capital: Deep dive in how to master the sell-side of secondaries

0:00Welcome to today's roundtable. we are a conversation with Alberto where we're going to talk everything secondaries and the sales side of it. Maybe if I could ask you, Alberto, to just give everyone a quick introduction to yourself and Giano Capital. What's your experience with secondaries? Thank you very much, Andreas. Thank you everyone for being here. It's a great pleasure for me to be here today. My name is Alberto Shalon. I'm the founding partner of Giano Capital. General Capital is a new fund. We had our first closing last year and our mission is mostly to focus on secondaries single asset, which we're going to then explain what is the difference with the usual secondaries.

0:45In a nutshell, we are looking for digital tech companies within the European space that are doing at least 30, better 100 million plus revenues that are growing at least 30%, that are profitable, that are cash generating. And they have a plan for an exit in the next two, four years. And then I will explain why we can enter into this company through secondary transactions. Our fund already deployed some capital. Officially, we have two transactions. One is with Get Your Guide, the second one with Finn. And there is a third one that we announce in the next seven days, which is still I cannot confirm, but we are very close to a very, very interesting closing in one of the most well-known brands in Europe.

1:36Amazing. And today, or today, I was about to say today, but these days are definitely the days of secondaries. A lot of opportunities are out there right now. But today, we're going not to be talking about the buy side, which you're on, but the sell side, rather, because obviously, our core audience on the European VC podcast are all VCs. And for that reason, it's oftentimes more on the sell side that they're trying to figure out exactly how do their mechanics work here. So maybe before we dive into it, Alberto, if I could just ask you to give us an overview of the secondaires market, then to the rest of you, you will hear everything about the key players and the stakeholders.

2:16What are the types of sellers in this market? How do you interact with intermediaries? What's the buyer process like? How do you prepare the sale from a fund? How do you work through valuation and pricing? And all these topics that I know are really pertinent to you. But first, I just want to start with this overview. So maybe Alberto, give us a take on what are you seeing being the core definitions and key components related to selling in the world of direct secondaries and fund secondaries? Yes, sure. With pleasure. So first of all, we need to understand that the market in the last 20 years has changed very much.

2:57So if you remember for the one that was already in this market. In the year 2000, companies with a simple idea of just starting of revenues, they go immediately listed, right? And we had this crazy bubble that, of course, has been a big mistake. But in a nutshell, you could have an exit very quickly. Now, nowadays, if you consider that the average exit, it's 12, 15, 16 years, you understand that there There is a great opportunity for secondaries. This is one. And why this exit is longer? Of course, in the last two years, we've all known the IPO market. It's shut down. That's true. But it's longer even when IPO, its market is open.

3:40Why? Because there is a belief that I think it's true and it's right that bigger is better. So now companies usually try to get an exit when they reach at least 100 million plus revenues. And to get to this point, it takes them 12, 15 years. And if you're also looking at the other side of the market, potential buyer, which is PE buyout, again, bigger, better. And also strategic, often they look at certain size, except some exceptions. So in this long journey, you have at some point starting year 7, 8, 9, and 10, you have an opportunity to jump into this company through secondary transactions. And there is a real need in the market, and especially in the European market, because then I want to focus a little bit more in the European because we live here.

4:31And I think our market, in respect to the U.S. market, we are, as always, behind like five to seven years. Yeah, no doubt about that. And also probably what prom secondaries oftentimes were also moving a bit later, because at least that's what I observed when we saw this huge boom in secondaries, definitely something that we saw moving in the U.S. early as well. Do you think that as or where would you say just in this U.S. your comparison, because we hear all so much from the U.S. What do you think that anyone listening to all the prodigies in the U.S. talking about venture capital? What do you think that you should keep in mind as a European investor when you're hearing U.S.

5:17investors talk about secondaries? Okay, first of all, I think we need to make clear that we have two main big difference between Europe and US. A, it's the mindset of the investors. Most of the US investors are much, much more risk taker than the average of the European. This by definition, and historically, this is what we are seeing. Two, the relation in Newhouse is made in the article of a private company. And I would say with all the strategies, you join the second round. This is not possible in Europe because everything stays private. So to do your proper job in Europe, you need to be capable to access to the founders, to the managers, to the cap table, to the official information.

6:15And you need to have a dialogue. So this is the big difference between Europe and US. Yeah, yeah, absolutely. Okay, but then now let's dive into sort of the meat of this, meaning defining the key players and stakeholders. If we start with the types of sellers that we have in the market, could you just describe them and specifically focus on the motivations that you should pay attention to? Yeah. So we have two big groups of potential sellers. When you approach a company that is, I would say, 10 years plus old. A, there is the founding team, employees and former employees that has been working since inception or maybe in the last seven years, has been accumulated on paper some value.

7:06and it's totally acceptable. And I think this is a further motivation to push and it's a full alignment of interest. If this person wants to monetize up to, I would say 20 % of this participation, that's totally. With this capital, founders and actual employees will increase a little bit their life. They might buy an apartment. They might be capable to send their next generation to top universities worldwide. And this capital will make them more motivated to work very well until the end. This is the first group. The second group is the early stage investors from Business Angel, Seed and Round A.

7:54So these people, for several reasons, need to find liquidity. So the venture capital, the GPs, as you know, they are lacking about DPI now, and they cannot wait 15 or 16 years. Even they can wait for a greater return. At some point, we have, especially nowadays in Europe, we have a systematic problem. If we want to keep our venture capital credible, we need to return capital because otherwise we will not be able to raise more capital. And here, the only way we have today is to try to have partial liquidity rent to return this capital, increase our DPI, and then having new capital, new energies for then invest in early stage companies.

8:42And then when it comes to the business angel, when the company reached this size, has no more relationship as he had in the early days with the founders. And his role, it's end. So it's happy to have his 20, 30, 50 time return money, getting the cash and finding a new amazing founder and start became this journey. This is his mission. So those are, in a nutshell, the seller we can find in the market. and this is the one that are populating the secondary market. How about LPs? Because that's also a group that we often see. What's your take there? How important are they? When do they choose to liquidate themselves?

9:30Is it even an option? Could you talk a bit about that? Okay. So I don't know if by LP, you mean LP is in a fund, I imagine. But when this is the case, it's not for us because this is more for people that are doing secondaries in funds. So they buy LP stake or GP stake. Because we're going in a single asset, we look at the cap table level. And a cap table for me, my counterpart is the GP and the fund itself, and it's not the single LPs. When you do secondaries by funds, of course, the LP stake makes sense, but not for us. Yeah, exactly. And we're going to talk much, much more about that at a later point and in a later one that we're going to do with our good friends at Isomer Cabal, because that's what they're very specialized in.

10:19They're doing 70 % of their secondaries fund into these types of investments. But today we're focusing entirely on the direct. So then let me ask you, what about the role of intermediaries for sellers? How do brokers and intermediaries assist or not assist, which is maybe the more important part in this selling process? Okay. What we have seen again in US, there is a lot of broker that usually and typically doesn't assist much. What they have, usually they have either the supply or either the demand side. And then they're trying to find the missing part of the market. In Europe, it's often the case where you have either banks like Goldman, Morgan Styling, Deutsche Bank, or you have M &A boutique that can take care about the secondary transaction exactly as they are taking care about the primary.

11:13where there is a clear process where they give you access to full VDR, where they are available for Q &A, they are connecting point between you and the manager and support this transaction. But this happens only when the secondary is an official process. I would say there is a decent size, I would say 30, 50 million plus, and this is the case. And if it is less, I think it's more to one-to-one transaction. Jano can interact with the management and try to get all the information needed and arrive to a go-on-go. Could you tell me a bit, Alberto, about how to best, as a seller, engage with these intermediaries?

12:00First of all, the seller, we have to make a distinction. First of all, if the seller is a GP, I always recommend, first of all, to align these opportunities of these requests and the needs with the founder and with the top-level managers. Because as we are going to discuss in more details, without the consent about the majority and the board, this cannot happen. So then once you have these opportunities, and here it's very important how you explain, because sometimes some of the GPs, they are a little bit reluctant to go to the founder. that they have sustained for a year saying, look, I need liquidity because they don't want to look like they are not believing in the company.

12:47But actually the way they have to present it is that, look, there is a bigger picture here. I need to look also about my fund, about the DPI. And I think your asset, because it's a great asset, is an asset that I can more easily liquidate for my bigger picture. It's not that I do not believe anymore in the company and the founding team. And when this message is understood, you might have the support of the founding team and the manager. And here, if the transaction may involve them because at this stage, they may say, oh, look, it's a great opportunity also for me to get some liquidity. They can together engage a bank or an M &A boutique that will help them with the process.

13:32Yeah, makes sense. Makes a ton of sense. Okay, but then let's shift to the buyer process and understanding the process of a sophisticated buyer. And I think that here, I really love your framework because everyone has frameworks for how they invest and how they think about deals. But not everyone is as clear about it as you are, Alberto. And I really enjoyed getting to know that the last time we spoke. So maybe let's just understand the process of Giano Capital when you go in and connect it to that. Let me just bring up a question that we got from the audience. It was Dharin. He asked, what is your minimum and max amount for your secondary purchases?

14:15Just do a bit of conversation on that as well. Yeah. At Giano Capital, I would say that our three spots is in the range of 10 million, but we can get lower. and higher. So 10 million is the sweet spot. All right. Okay. So with that out of the way, now let's dive into the model of Chiano Capital. So if I just line up really quick, then you can talk about the individual aspects of it here. But let me ask you, so you have this process where you're starting out. It's a one, two, three, four, five, six step process. You've got the first step is the quantitative, the scorecard. Then you've got a second step, which is the more quantitative detailed look.

15:00Then you go into a qualitative analysis. And then you only then do you go into valuation and agreement on price. And after that, you then discuss or define the legals and do the financial DDs with external parties. So we're going to talk a bit about that. And then in the end, of course, you close the deal. So that's your process. That's how we can break it down in six steps. And maybe if we start in the first one, the quantitative, the scorecard approach, what are you looking for there specifically, Aperina? Okay. First of all, we must consider our secondary transaction as a primary. So we must have a serious due diligence on the company.

15:40So this means that, again, when the company, when the management, when the founder agree to start this process, they need to be ready to share confidential information under the NDA as much as they did with their previous funding rounds. So we start to ask them as much information they have ready since their latest capital increase. Then we ask for the latest audited account, if available, or account financial. We ask for budget and we ask for the three-year plans. With that, we can already have enough number, quantitative approach to fill our scorecard. In a nutshell, our scorecard, it's 14 KPIs, okay?

16:36That's going from margins, profit, CAC, lifetime value, growth, CAPEX, OPEX, all the kind of TPI that makes a lot of sense and including multiple in the market, public compartments. And here we have a clear picture if we want to go forward or not. And why we do that immediately? Because we believe that it's very important to being capable in a quite short time to have a first understanding. If this company makes sense for us to go further, maybe it's too early, maybe it's not it's too risky so then after this first we are capable this first step we are capable to go back to the management and start engaging and start to give them the first idea about what we consider evaluation because the tricky point in a secondary is always okay how much you're gonna pay so if the valuation and the price per share makes sense that will keep going with engagement and we can go for the second and third and fourth step.

17:45If the price we are too far, let's say I am, I don't know, 300 million valuation and Andreas, the seller, expecting 600. It doesn't make sense to go forward. There is no room for negotiation. So, but if we align, you are going to be motivated to give me, I don't know, a few hours per day to complete the due diligence. I'm motivated to go forward because I know that when the answer, okay, we can then close the deal. So this is the first step. The second step... Could I just stop you here? Just because we all know the VC funnel, it's very, very wide in the top. What's it like for a secondary buyer?

18:22Is it as wide? Sorry, can you repeat? The deal flow funnel here. So in VC, we all know that you're looking at a thousand deals and then you maybe take a hundred that you look closer at. And then it very quickly becomes a very narrow one. How broad is it for a secondary spire? I will share what was general capital numbers in the last 12 months, right? We had analyzed with the first look until the scorecard over 100 companies. And then we have invested in three companies and we have, I think, 40, 50 that can still be alive in the next 6 to 18 months. So that means there are some companies that we believe that are still a little bit too early or they're not ready for the secondaries that we keep in our kitchen ready to be cooked in 6 to 18 months.

19:19So those are the numbers. The market is quite big. If you consider a company that they're generating more than 30, 50 million in Europe, I think we have easily 500 to 700 if you include UK. So it's quite a big market with a lot of possibility for secondaries. Yeah, amazing. Okay, but then let's get into the second stage, the more quantitative detail. What do you look for there? So then once we have a first understanding about the process, about the valuation, here, where we want to engage with the most strategic manager of the company. So we start with CFO, we start with CMO, of course, the CEO.

20:00And then we go down to the operation to really understand what are the numbers behind, what was the past and what would be the future. So we want to understand where the company can go in three to four years. And to do that properly, we need to understand the past and we need to understand the KPIs, the mechanics and all the numbers. And when we do that, then we also like to go to the next step, which is to make comparison with competitors, reference score, standard things that you have seen in primary round at 10 million plus, because anyway, we are investing 10 million plus in this company. So we are taking our risk.

20:39It doesn't mean because it's secondary is risk-free. So we need to run a property diligence. And that's the second step. Then what's the qualitative one? Or did you bundle the two here as you described them? We bundle the two. When we start to do reference call, it starts to be more qualitative. The good thing of the secondary sometimes is that when you know the market, you can call some of the board members and have insight without any conflict of interest. Because secondaries probably will not be interested by this board member. And you may be getting insights about the companies. And one of the good insights we always like to ask is how much the managers are reliable with their forecast.

21:25This is an important question. Because if you have someone every year say, okay, we're going to do 100 next year, and then it missed by 20%, 30%, this is quite risky because then I need to cut 30%. And because we always try to cut 30 % to stay conservative, if someone has already a 30%, it's going to be 30 plus 30, and maybe I don't want to invest in this company. Because then if I think to IPO, what makes successful company is to be capable to give as much as possible precise forecast and being priced, you know, properly. Yeah, absolutely. Okay. And then now we're getting to the hard part, maybe, or the one that many think about when they think about secondaries.

22:11How the hell do you price this? How do you come to an agreement about the price? Our belief is, first of all, to look and to work on the closest public comparables. So then we look what is available and we compare our company and we start thinking, OK, what could be today the public valuation of our companies? And then we apply the multiple of their competitors. And of course, sometimes you deserve a premium. Sometimes you deserve a discount because let's say that if your growth rate is double, you deserve a premium. If your margins are lower, you deserve a discount. And then we think, looking forward, what are the risks about this company?

22:57What are the risks that the multiple that today is available will not be available in three years? And then we try to arrive to numbers that make us comfortable to have our return, which is three times our capital in four years, which leads our 25 % net IRR for our LPs, which is our target as a firm. Yeah. So that's, you know, how should I put this? This is a step where I think that many think that there's more negotiation. And also, I often hear when I talk to people about secondaries, many come in and ask, so what's the standard discount that I should expect here? Something, well, it's a down market, so now I should be getting 50 % discounts.

23:47And that's the neighborhood I should be looking for. Whereas, could you speak a bit to that idea, the whole notion of there being standard discounts that applies to secondary steels? uh actually andreas we don't love to speak about discount because discount it's a negative concept by definition what we want to say is stick to the reality so why i started saying public compatibles because i want to have the reality in face and i want you as a seller to really understand what is the reality if we consider the public market the reality we need to start from that. And then if there is a discount or a premium, it will be depending by several factors, right?

24:31So I like to start by the reality. I don't like to start by the discount. And of course, if there is a discount between your previous round and the realities, this is like also happening in the public market that sometime your price per share dropped 30 % and you should consider that is a discount from six months ago. Actually, you don't say there is a discount. You say, oh, my company value today lasts 30 % than what was before. I wanted to hammer that point home because I think it's one that many attempt to get wrong. And at least that's where I hear a big difference in how people that are very sophisticated secondary buyers that do this all the time as a profession and the people that are more touristy or just in a position where they only sell once in a while and for that reason, or maybe haven't done any sales and for that reason, we end up kind of picking the wrong mindset to think about secondaries.

25:37Let's get to the second to last point then, the legals and the financial DD with externals. Tell us a bit about that stage. What should you be ready for as the selling party here. Okay. So once we are all aligned on the quantitative, on the qualitative, and we are happy, I would say at this stage to sign an LOI, I would say, binding or non-binding, and we agree the price, we agree the number of shares, we agree the at the committed capital, the last step for us is to engage with legal team that will go through the legal paperwork, shareholder agreement, term sheet and everything, and sometime also with, I don't know, auditor firms that will go into the bank account, business account, and to check that everything sticks to the numbers that they share to us.

26:33And, of course, when this is confirmed, we're more than happy to go into the closing. Yeah. And here we have a question from Jose Martinez. He is asking which structure is the most attractive for buyers. And I think that even though you would have decided this at an earlier point, it's probably the stage to bring this up. What do you mean by structure? Sure. Yeah. So it's a good question what Jose thought about it specifically, but I think what's relevant here to think about is one, you have different stock, you know, your different places in the stock, in the preference stack. So talk a bit about how you think about that.

27:19And also talk about are there terms that might be in the funding rounds that have been before that you're like, then I'm not getting it. Would you ever buy common stock as an example? Yeah, okay. Very good question. So A, we buy common and we buy preferred. We also able to buy a mix between common and preferred. What makes sense is to understand how many commons, how many preferred and which kind of preferred. And then when we do our price, of course, we need to consider what could be the chances to have a problem where the liquidation preference makes sense and this come to the conclusion if it makes sense or not and what could be the price per share.

28:04Of course if we buy higher share class with higher protection of course the price could be higher. If we buy a lower class, we deserve a lower price. What we have seen that can sometimes happen is in between a primary, the company organizes a secondary and sometimes they're ready to change the share class to the latest share class if they're all bored and the shareholders are in agreement to do that in order to give to the secondary buyer like us the maximum protection in exchange of the higher possible price. Yeah, absolutely. Okay, so now let's go to the closing part. So the final stage of the process, could you talk a bit about how this happens?

28:58Also, maybe a bit about timings, how quick does this have to happen, that type of thing? Yeah. So first of all, when we have, I would say, green light from lawyers and from auditors, Here we start with the process. As you know, we have already engaged with the manager, the board, it should be all full aligned, but there is a long process with the shareholder because even the board and the founders has some rights. When it comes to secondaries, there are rights that the shareholder can tag or can have their drug or can they also participate to the secondary. So there is always some time for preemption.

29:39It will take like, I don't know, technically between 20 to 40 days to have a serious closing, depending on the shareholder agreement. Yeah. Okay. Very cool. We just have one question from Ian Sosa. He asked, how do you deal with secondaries from SPVs? And he asked the follow-up questions. Do you sometimes buy the SPV itself? Okay. the fact that there are some people in the market that buy SPV, the only reason that they buy SPVs rather than going straight in the cap table is that either there is not a full alignment with the company, so they want to do that behind the scenes, or with the alignment of the companies, they don't want to go for the formal process, right?

30:28In our case, at General Capital, we don't want to do that except for the case where the companies will give us full access and will let us know, okay, look, we don't want for ABC reason, that might be good reason to the full process, please buy the SPD. But usually we don't do with the consent of the company because A, we will not have access to the data room and B, we're not going to have a lay agency. The other side of general capital is once we are in the cap table, we want to be supportive to the founding team, to the manager, and we want to have a very, very friendly relationship with the boards and the other shareholders.

31:06So we want to be open and to stay behind the ANS PV. This is not for us the right way to do things. Yeah, very cool. Okay, so Gianno, now, sorry, Gianno Alberto, now I have a question for you and it's in a completely different direction because we've closed the topic. We've just run through the whole process of how you evaluate an asset. Now I want to go into a different part, which is the preparation for a sale from a fund. So if you're sitting here as a GP and you're thinking, should I be active in the secondaries market? How do I get started on this? And here I'm thinking about things like the portfolio assessment, the valuation preparation, all that work that goes into it before you execute on anything.