E249: How LPs Unlock Liquidity Without Selling

0:00Alex, so you allow LPs to loan against their illiquid positions. Tell me about this and how does one go about loaning against their illiquid position? Sure. So we essentially provide NAV loans where LPs in private fund interest, they can use it to serve as collateral. So we assess the underlying portfolio. We model the expected cash flows and structure a credit facility or term loan against that. And this is essentially just a way to unlock liquidity without forcing a sale. and it's just designed to be efficient and discreet for the LPs. An LP needs liquidity. They have the option to do a secondary because this is a second option of getting a NAV loan.

0:40In which case, it's just somebody get a secondary versus NAV loan. So essentially, it's a day discretion. I mean, with a secondary, it's permanent. So you're exiting at a discount and using the future upside, whereas a loan allows the LPs or potentially the GPs to assess the liquidity while still retaining ownership in that particular fund position. And it's particularly attractive when someone has conviction on underlying assets, but simply needs the liquidity for personal other business uses while the investment uses. Give me a sense for your scale and how many of these deals have you done and who have been the early adopters or who have been the counterparties on these loans?

1:16So, I mean, we've structured loans ranging from a few million up to about$50 million. Our platform is designed mainly to scale for the needs of ultra high net worth, family offices, small institutions. We haven't really focused on large institutions. So we've tailored more for high-necros. They've got investments in alts, and especially as alts are growing, the general need for liquidity has become more prominent, both from the fund side and both from the investor side. So that's kind of like the vertical we service thing. We've seen a massive demand through the wealth management channels. That's been a massive need and demand push from us.

1:52And that's sort of where the main focus has been focused on. give me a sense for the rates in the market today just from it really depends on the quality of underlying collateral so we look at diversification the maturity of the fund the rates generally fall on the high single digits to low to mid-teens depending on the quality so your blue chip type funds will be on the lower side and then the more risky or you know venture type assets that we'd look at will probably be on the low to mid-teens and the pricing really just reflects both on the on the illiquidity of the asset and the flexibility that we're providing.

2:25That's sort of how we price it, but it's really depending on the underlying collateral. What are larger institutions doing versus smaller institutions? The high net worth investors often, so from a use perspective, they're using it mainly for personal liquidity needs, but institutions such as pension funds, endowments, larger family offices, they're using these sort of NAV loans for the portfolio management, capital calls and rebalancing. So on the one side, We're seeing ultra high net worths are using it more like personal tax, et cetera. And then the large institutions and family offices, it's a lot of restructuring, optimizing the portfolio, potentially finding an arbitrage to retain the existing positions and receive the upside that they intended and to reinvest it elsewhere.

3:07That's where we're seeing there's a massive difference in the use of funds. To large wire houses, JP Morgan's, Goldman Sachs, they in theory at least provide these kinds of loans. Are you competing against them as a different part of the market? Tell me how you fit into the ecosystem. So directly and indirectly, a lot of the larger banks, such as JP Morgan, Goldman, they focus a lot on their clients, we've noticed, and funds that are on their platform, whereas we are a little bit more bespoke to a large extent. Also from a timing perspective, client onboarding, our main focus is the lending relationship.

3:37We're not trying to get into the wealth management space, etc. So we're trying to be as omniacent and flexible as possible. and that's kind of how we differentiate. Whereas when you go to a bank, there's a lot more comprehensive services you can receive as well. And that's sort of how we come in. But we get, yeah, we get a lot of bespoke requests and it's very depending on the client, especially with speed. That's where you find there's like a big differentiation in terms of the bespoke speed needs that they have. And how do you balance speed with doing enough diligence and what exactly are you diligencing on these assets?

4:10We get an overview of the underlying portfolio companies. but we don't do a deep dive into each single one we relatively have a lower ltv um to kind of cancel a little bit of the risk hence why we're not taking much of a discount on the assets um but yeah we've got an amazing team that goes through a deep dive in terms of like the documents they received through the underwriting process um and then we take a conviction on that based on giving them an ltv rented terms as mentioned like previously what are the ltv rates today Anything between 20 % up to 40 % we've done. So depending on the use of funds, depending on the unlike collateral, we've stretched it between.

4:49Also, depending on the interest rates that they're looking to get, we've changed it quite a bit. So we've got a whole standardized model, but we've also got very bespoke ones and that really depends on the client by client phase. So you may have 10 million in assets. You could loan out two to 4 million depending on various factors and depending on whether you could underwrite the underlying assets. Correct. and the idea being that if you have 10 million dollars as you mentioned sequoia a blue chip andreason horowitz then you more or less know that it's unlikely to be to go down more than 60 80 you have that comfort for yourself and you're really looking to diligence the underlying whether they own the assets is kind of like the ownership versus the actual portfolio correct and we also have to have a look if they've got existing pledges or um other credits um liabilities so we've got to just assess them from a personal perspective just to make sure that all of that is in place to make sure that we can retain the funds, the principal interest of the time.

5:43You mentioned high single digits, low teens. What are some of the drivers? So what do you need to see to get them the high single digits and what de-risks it to you as an investor and as essentially a holder of these assets? Back to regular funds, vintages, sort of quality. So we've kind of built out our own analysis of a range of different funds in the markets and we work backwards from there. That's kind of our dictation. But every use case is different. Like we've had clients with one or two fine positions and we've had a client with up to 30. So depending on the portfolio, that's kind of why it becomes like more of a client for bespoke type solution from a cash redemption, private equity and private credits would be easier to get towards that price range.

6:24And we're working towards getting on other asset classes like VC towards that price range of the time as well. Maybe because VC is more volatile than private equity. Yeah, longer term, we found that that's sort of where our range is fitted. But over time, we're looking to bring down the price overall as much as possible for all asset falses. What should larger institutions do today in order to gain liquidity? And how do they solve their liquidity issues? From a large institution side, you see a range of different uses. Like NAV loans are very prominent. This is not really a new concept. There's amazing players out there in the market, larger credit funds and banks that do this too for the institutions.

7:01but from like a rebalancing perspective like nav loans can be quite a useful tool for them just to rebalance their portfolio get some cash and keep the keep retain the positions that they've got just being aware of if they can pledge their assets going into an investment or what they have on the existing portfolio that would be quite a useful data point for them to understand um on the secondary funds it's really on a case i can't speak on whether they should go through a secondary process but in any sort of given liquidity situation the premise of just knowing that you can attain liquidity, whether it be through the secondary market from a sale or through a loan, is quite a positive data point just to understand whether you can or can't.

7:39And then from there, it really depends on sort of the process. Like, of course, it's at their discretion. Sometimes it's more preferable to get rid of the assets, go through a discount, the tax, et cetera. And that process is done because if you go through general liquidity process, there's the opportunity cost, there's a time, there's a process. That's why we've seen a lot of resection on the loan front because you don't have to go through and find a buyer or go through a brokerage firm, et cetera. Whereas if the collateral fits certain criteria and you're happy with the pricing, you can keep the asset and just get a loan against it.

8:10We've seen quite a big speed difference on the NAV loan perspective versus the sale. Are these typically recourse loans, non-recourse loans? And tell me about that dynamic. Certain breach of assets that we're extremely comfortable with, they'll form on the non-recourse side. For certain assets, they may have limited recourse through a full personal guarantee, which a lot of ultra-hundreds are very comfortable with in the space based on their background, especially working with facilities and credits. So yeah, it really depends on the underlying contractual. But we've been negotiable with a lot of use cases and a lot of channels that we've built deep relationships with.

8:45And it's always been curious to me that these loans that underwriters aren't looking at the purpose of the loan, for example, buying a yacht on one side versus making an investment. In theory, the investment has value, should go up. And oftentimes, these are the best opportunities where people are willing to take out loans. Why do you think that the purpose of the loan doesn't play more as a factor? And perhaps I'm missing this point. Is purpose of the loan kind of a big factor? As a massive driving factor, we've seen most of our adoption happens through third parties who manage the wealth of a lot of these LPs or sometimes GPs, whereas either from a tax accounting or wealth management perspective, they see the opportunity to get leverage against illiquid assets.

9:25It's a very valuable tool for their clients. So that's where the purpose is derived, whether it's for rebalancing a portfolio, being the CIO of a family office, whether it's just wealth management and diversity for an individual or a family office to get personal liquidity or to make other investments that are very timely to find an arbitrage or for tax. We've seen the purpose definitely drives the need. We've also seen just some use cases where we've given terms to individuals and families just for them to understand what they can get. They may not need it at the point. They just want to have an indication of what funds would be accessible through us and that they can get liquidity to make them a little bit more comfortable keeping the assets.

10:04I definitely think purpose drives the need for liquidity, but also just having this as sort of like an insurance policy to know that you can get it for certain assets that you have got an investment with. It gives you a little bit of an insurance policy personally need to know that these can be leveraged if the need for liquidity comes. Said another way, it increases your risk tolerance, it decreases your fragility, knowing that you could always borrow maybe at a higher rate than you would like, but you could always borrow some standby loans if something happens, if you have a capital call unexpectedly and things like that.

10:35It makes the investing less fragile. 100%. A big use case, and specifically in venture, but also in other classes like private equity today, let's own private credit, is GPs are having trouble making their GP commits because the time to DPI is a long amount of time. For the use case of a GP, let's say they're on a fund three and their first two funds have not gone liquidity. Talk to me about how a GP can leverage their previous both GP commits as well as carry in order to underwrite their GP commit in the third fund and just some lessons learned from that? Our main focus has been on the LP front, but of course, naturally, we've received a lot of demand from GPs, especially some GPs that are LPs of funds.

11:20So we don't focus on carry. That's just not part of our core business model. So we focus on fully funded positions. We've seen a range of different solutions on the GP front. We try not to push just our products. So they've got a range of different solutions. I mean, some funds have got continuation vehicles. They've got existing subscription lines. so depending on the use of the funds but the main use case is just more on the personal side where gps have come to us either to get a personal loan um for personal reasons or making other investments as a lot of their um their net worth is tied in their illiquid vehicle that they started or co-founded and then we've also seen a lot of use cases where there's um there isn't as much dpi as expected which happens normally in the private markets and a lot of gps have come to us to kind of get the LP sum liquidity in the interim, which LPs consent for, or they would like, and they would like to retain the position of the fund.

12:11So we've seen a range of uses. So we're just a tool. We're kind of like just an open-minded tool that they can have on hand for their use, but it's really, there's a range of uses that they might get, and there's some that we probably don't know to the States. And I want to stress test the model a little bit. So you said 20 to 40 % LTVs, oftentimes for GP commits, or, you know, it's like the house car baby, you know, It's like these small purchases that people need to make at some point in their life cycle. And taken to the extreme, let's say you have a portfolio of 500 startups or many different assets.

12:43Is there always an amount of money that you would loan against? Could you push that down to like 5%, 10 % for somebody to fund their GP commit? Or is it kind of binary, we like these assets and not, and then it's within this window of 20 % to 40 %? It's a mixture. So we do have a more standardized approach where it does fit within that 20%, 40%. But we are flexible. Our loan ranges have been roughly between one up to$75 million we can take in. But for certain cases, we can lower the LTV, like you mentioned, to lower the risk. So be comfortable with the individual or the borrower and sort of the asset cost from an underwriting perspective.

13:18We can be a little bit more flexible on a bespoke basis. I know you're very asset driven, but behaviorally, it must matter to you, the borrower, their credit score, their track record of paying off their loans. How much does that factor into the process? It definitely has a strong factor. We don't go through, we don't change the credit score or anything like that as these aren't consumer loans. But we focus on just understanding A, the use of funds, their history from a personal balance sheet perspective that is important. so we do take a view on the personal financial statements or the statements of the family office to understand what existing leverage has happened previously has it been paid back so there's a bit of a track record in terms of managing financing or what other pledges have been so yeah that is a good indication to understand the use of funds even though we don't limit it is quite important so whether it's to make another investment to know whether investment is going to happen or whether it's to for personal uses um guard for a bit of divorce or if they need it for like a family emergency it's important for us to to know the use of funds just understand that will this principle amount be used at the given time all up front or will it be used over a period um and do the other do they have other methods to bring in income either to pay the interest or we could do sort of like a reserve interest component whereby part of the principle we would reserve a proportion of interest up front so they're less just to pay at the end when they when they pay back the principle So there's different structures that we're happy to accommodate based on the borrower.

14:45Circling back to this use of funds for your investments, how positive of a use of fund is that if you were funding a new investment? How would you rank those range of uses? Like what's the best use and what's the worst use? I'm just, I'm using more realistic language, but really like from a risk standpoint as the creditor. What would your ideal use of funds be and what would be the worst use of funds? How would you rank them? I say more on the business side to make other investments or capital costs, because then we know where the liquidity is being driven to from an asset allocation perspective.

15:15So if those were to be seen as the collateral that, God forbid, we would need to seize in a collection perspective, then we know what we can take conviction on. On a personal side, those, we think, are a little bit more risky. It really depends on a case-by-case basis. Those are needed for personal uses. But then, of course, if we're comfortable with the underlying collateral that we would use if we were to take a personal recourse, it's hard to rank in too much. But I'd say when the business case perspective, it's easier to follow the flow of funds to understand where funds are going. Because if we've got a little bit of a conviction on the assets they're looking to invest in or the capitals they're looking to make for those underlying funds, if we've got a certain conviction on where those are driven to, that would help us.

15:59just easier to manage as opposed to if the funds go elsewhere, are we confident we can receive the principal and interest? How long on average, not the mean, but the median time that a loan takes and what's 80th percentile? So our average loan is roughly 24 months. We do loans between one to four years and we can refinance it based on the need that they have. And loans can take relatively, if we're comfortable with sort of the funds, they can take about two weeks from initiation legals to deploying to more complex cases can take absolutely truthfully about 14 weeks. I'd say lower, but to manage expectations, the longest we've done is like 14 weeks.

16:36So it could range between that. But if we're comfortable with underlying, we can get just an S3 documents in place. There isn't too many different legal structures from a trust perspective. It's a trade will take on the shorter side. Last time we chatted, you said something extremely interesting, which is you're now partnering with funds to be standby NAV loan lenders, essentially. You'll partner with the ABC growth equity fund. And if any of their LPs need loans, you've underwritten the fund or you're up to date on the fund and you can underwrite it quickly and provide that kind of standby liquidity.

17:05I think this is going to be a big trend in the industry. Talk to me about that. And do you have any examples you could talk about whether named or unnamed? We aren't like discretion with the actual names, but we have been approached by some private equity funds that have got previous vintages, VC funds, and they would just like to have it on hand. So So it kind of sends a certain indication to the investors that it makes a little bit more evergreen. So we've seen a few of those approaches. It's a little bit difficult to do on emerging managers in the VC space, but definitely a need we would love to cater for.

17:35Or we see the need arising more and more. To have illiquid funds that have kind of been pre-screened as you go through raising. To a certain extent, we've received data and just indication from a lot of GPs that it helps to a certain extent on the fundraising process. because then investors know that the fund can be leveraged. It's been pre-screened and it can potentially help them raise more. We don't have specific data, so we don't want to overstate anything, but that is some feedback we've received and that is a channel that we are growing and helping with. We're active in the GP stakes field.

18:09We think it's a really interesting field and it's one of those situations that's solving its liquidity needs just in time. You have these 10-year funds that turn into 14-year funds and now people are doing evergreen funds. and have you looked at that space and what are your views on the space? There's a lot of these small to larger funds is great funds like Heinz of Point Capital. And I think it really depends on just the need that they have. Sometimes, as mentioned, there is the opportunity to buy out a position and it's more preferable than a loan. So it's great to have just as a customer in life, just to have as much optionality as possible is really just important, both from sort of the supply side, like being the GP or the buyer side.

18:48just to know you've got all these solutions in place because it really depends on the person at the end of the day. Sometimes from a financial standpoint, a loan or a secondary may make more sense, but their preference based on the personal relationship with the fund or the personal conviction on the assets or their personal liquidity needs. So I think it's just really good from like an omniscient position just to have flexibility and options. So we're just trying to fill that one gap, the one gap on the lending side. So I think both are critical in the market. tell me about the origin story how did you go about founding liquid lp and how did you get into this business sure so my background has been more than from like bc fund business space i've started a few companies prior in south africa one in australia um had some success had a failure but naturally just through kind of my entrepreneurial um progress i've always been one that's had an actual loving and building relationship so had a lot of relationships in the um in the founder space and executive space of a lot of late-stage pre-IPO companies and saw similar models providing liquidity against private shares.

19:50So we started the business originally supported with to focus with Citibank to focus on lending non-recourse loans as employee benefits against executive shares and pre-IPO companies. And as we started to try to push and grow their company, we found a lot more product market fits focusing on LPs. And one of our earlier backers, which was a credit fund of Atlanta um they saw our growth and they would be amazing to work with and then we kind of like repositioned the business to focus on the LP segment based on a lot of internal and external fit for those markets um so they further backed us and they've been amazing and they've um and that's kind of how we grew more into the LP segment and we learned that we would rather focus on a diverse more diverse portfolio of assets um as opposed to single fund single company positions for a range of reasons.

20:38And naturally, our network was more in the LP and GP space, both with the fund and ourselves personally. Those are naturally progressed. But I'd say it came originally from seeing the opportunity with pre-IPO lending, which there were a lot of great players in the space. We just wanted to focus on more on the tech side and a platform approach. And then actually, just based on a lot of conversations and product market fits, we shifted to focus on this. And that's kind of how it evolved. what are some unexpected risks in providing nav loans and what are some kind of tail risks that you encountered and that you've solved around i'd say the pledging of the assets um and disclosure is very important so when underlying we've had a few cases in the past where we've we've underwritten um a range of assets for a certain borrower that was in that was inquiring and only after like stronger due diligence we found out that there was other assets that they didn't disclose that they've pledged um that they're still paying off or if there's like double pledging which is of course illegal but that takes certain due diligence and there's there is technology but i think it's still like growing in like the blockchain space where you can only pledge things once but right now a lot of it's contractually based um so that that was one challenge we did face um in a few cases that we didn't go through but we had to uncover in the private markets it's it's it's very hard to um to kind of just have conviction on um assets especially based on like no name brands you really just need to it really comes down to like the performance the use of funds um the quality and the trust of the borrower so these are all like light touch factors that just take experience um we've been fortunate to work with a credit fund behind us to help us in underwriting perspectives they came in with a strong credit view um to look at you know more venture private equity type assets that's helped having a compliment of a great team that comes from private equity and venture capital alongside a credit fund and an amazing advisory board, including Mike Roffler, came from First Republic Bank.

22:29I think that combination has been quite a blessing to approach the market. But naturally, different things arise from the price of, I'd say those were the factors. And you've built out a great advisory board around you. Tell me about that process. What are your lessons learned? What were some mistakes? What were some key lessons from building your advisory board? From previous ventures, it's always great to have great names on your advisory board. I think it's just important from the founder perspective and to manage expectations from the advisor to kind of have certain milestones or expectations in place i have found based on the stage of the company certain advisors brought on board too early with big names they physically can't do much in the beginning because they're at a certain level where they their impact is really more effective at their level so i think it's important to kind of not get too excited um like a horse before the carriage that phrase um to bring on really no-name brands even if they're very willing to commit and help at an earlier stage like you should try and meet them where they're at as much as possible or just manage expectations to be like cool we'd love to have you on on board in the beginning and we kind of did that really well with this company like we had a lot of expectations with advisory board but we knew that we had to get to a certain level and that's where they became more effective and we managed that really well on both sides so I'd say that was like one learning that I learned from my previous businesses that we applied here quite well what are the different vectors of value add that advisors could bring in and do you get them all in one person just talk to me about putting together a holistic strategy around your advisory board so i think definitely definitely introduce them to each other even before they may have like signed fully to see if there's like a culture fit to understand like there's a compliment and just a good connection from an energy perspective that was one thing that's um that i'd suggest based on learnings um And in terms of giving them always a full strategy of where they see the business and also understanding what are their goals, aside from a time commitment, dealing with certain advisors, they may have certain entrepreneurial goals they'd like to pursue in the future.

24:29They may have certain personal goals with their family. So just really managing expectations from a timing perspective, a conviction perspective, is super important. And just to be real with them. and yeah and certain advisors i think are crucial with opening doors some advisors are great just to have the names there and to give like sort of an insurance or comfort of credibility associated with the business that's it's a subtle like quiet touch but it is important um but really getting them involved in whatever capacity they can bring so like never to force something like in general life you could take a horse to the water you can't make um a drink but if you could just bring it close and then let it do its thing in any way or form i think that's naturally quite beautiful anywhere form so i think not four structures but just highlights in the strategy of the company where we're looking to go how we see the future seen if they align given their contribution um it's great and not forcing anything i think just that's one thing you're kind of meeting them where they are seeing their natural strengths their natural weaknesses playing around their strengths and not forcing a donkey to run in the kentucky derby meeting meeting them exactly where they are.

25:36Yeah, like there may be certain advisors, especially those more mature that have reached a level of self-actualization where they just want to impact the world and they're not too focused on like money and commercial. Whereas as founders, you're more focused on like profitability and just generating revenue. So you need to understand where they are. And even though they may like you personally and they may like the business, like their incentive is not to make money. It's great. They can make advisory fees and they could be maybe worth something. But if you can just personally meet them where they're at, even if it's helping on their philanthropy side and then come in and bring in just their perspective very lightly, but just affording them the time that they need to focus on what's important to them.

26:14That was quite important because when you do get their hour, eight hours a month, whatever, it's very impactful because they just feel personally, you just make them where they are. So I think that just, it's more like a life. Speaking of meeting them where they are, do you find that the best advisors are kind of driven by impact and they use the money and the advisory shares as a way to be shown respect? Or are the best ones the ones that are coin-operated that'll go to bat for you and kind of do the most amount of work? And how do you balance the mercenary versus a missionary? Yeah, so it's, yeah, it really depends on like the environment.

26:47There is that mercenary transactional focus, which is great. And sometimes it's like a second wind that they get after the pair that they can like dive into an entrepreneurial journey, back the energy of like the founding suites and just enjoy the ride. And like, I think that's a whole certain channel. There's certain ones that want to do well commercially and impact, or there's certain people that were found that will have like a sentiment towards the founders, such as myself or others. And they feel just that this founder in the future will do great things. They're aligned with the impact that I'd like to do now.

27:19So if I can empower him or her at this stage to do well, but kind of guide them also on like a personal and spiritual perspective on how they run their business from an ethical and value perspective. essentially you're kind of creating an impact on their question that they can be better in the future in maybe non-business activities so I've seen that subtlety and sometimes they're very open with it and you can just feel it by the way that they advise you or not how you should treat people or employees or direct the business and from an ethics perspective and that's quite a it's a great perspective that I've noticed through the podcast and through my expanding network I've gotten to meet these really transformational entrepreneurs people like Blake Scholl who started Supersonic yesterday, spent the entire day with the founder and CEO of Republic who's trying to digitize assets.

28:05They all have these drives to make these big changes and evolve society. And sometimes I struggle to translate that to the finance world. And how do you bring that kind of vision and how do you get people excited about something like making money or putting in loans? How are you able to frame that in a way that gets people excited to wake up every morning? Truthfully, it's also been a personal challenge to me because realistically, sometimes the narrative of, okay, we're lending money to wealthy people or privileged people, but what is the impact there? So like there is that question that comes back and forth from a personal perspective.

28:38In the end, there's a need we're solving. So as long as it's driven towards solving a genuine need or like helping people, especially in a personal financial position or just altering or growing a certain market, like opening up the alter market to become more investable, just being, you know, another liquidity option that adds value. Those are great. But if you can, I think engaging with people, like one of the fortunate things you've had the opportunity is meet definitely over a thousand types of investors that invest in the private markets and to learn through them and kind of like just exchange dialogue, exchange energy.