Private markets outlook: Private equity

What’s next for private equity? We continue our Private Markets Outlook series with a discussion featuring Jorge Rossello, Managing Director, LP Secondaries. He joins Research team members Andrew Korz and Alan Flannigan to explore how private equity investors are navigating a shifting landscape. 

The Private Markets Outlook podcast series from Future Standard features special guests and portfolio managers from across our firm, each bringing unique perspectives on private equity, private credit and real estate. Subscribe and stay tuned for more.  

Related:

Follow the value, not the herd: The new private markets imperative
U.S. exceptionalism: At a crossroads

For more research insights go to https://futurestandard.com/insights

Chapters

• 0:00 Private equity introduction
• 2:31 Interview with Jorge Rossello
• 35:13 Post interview thoughts with Alan and Andrew

Transcript

 [00:00:00] 

Alan Flannigan: The private equity industry began 2025 teaming with optimism. Market participants pointed to the buildup and dry powder and swelling inventory of companies waiting to be bought and sold as the proverbial coiled spring, ready to be propelled into motion by a new business-friendly U.S. administration and a further decline in interest rates, but tariff chaos quickly took center stage.

Capped by liberation day in early April and market optimism took it on the chin. Suddenly, allocators hopes that a deal making frenzy would finally remedy liquidity issues were dashed or at least delayed. Public markets would return to form post-haste, oscillating through the will-he-or-won't-he public policy uncertainty, but marching to all-time highs.

Meanwhile, uncertainty clouded private markets. NLBO activity slowed, but [00:01:00] GPs found solutions to continue driving value. They pivoted toward add-on acquisitions, focusing on smaller strategic tuck-ins over extending for a headline-grabbing LBO. The secondary market asserted itself as a solution, executing over 100 billion in volume in the first half of 2025, matching investors pining for liquidity with those seeking an attractive entry point.

As has happened so often throughout history, the market saw a problem and devised a solution, but now the slow grind has begun to smooth. Summer's paralysis has given way to a brisk confidence animating the market in its stride.

At August month-end trailing-12-month U.S. M&A volume was up 20% year over year. And U.S. private equity GPs were on pace for their strongest year of deployment since 2021. The U.S. is leading this recovery. Economic growth remains healthy if a bit uneven. Business confidence has stabilized. And on September 17, the market got a long-awaited rate cut [00:02:00] with indications of more to come.

We're yet to reclaim the vibes of early 2025. But as a more certain backdrop has emerged and other preconditions aligned, optimism is growing. For our third episode in the Private Markets Outlook podcast series, we turn to an investor who's been at the center of it all this year and get his guidance on what lies ahead.

We're pleased to welcome Managing Director of Future Standards LP Secondaries team, Jorge Celo.

Alan Flannigan: Jorge, thanks for joining the show. 

Jorge Rossello: Absolutely. Thank you guys for having me. 

Alan Flannigan: And as always, uh, I'm joined by my esteeed podcast co-host, leader in research, Senior Vice President, Andrew Korz.

Andrew Korz: Thanks, Alan. Uh, it's great to be here. Very excited for this, uh, this conversation. 

Alan Flannigan: Jorge, again, as we said in the intro, you've been right in the middle of the action this year. Uh, you know, helping facilitate some of that liquidity, uh, amidst some of the challenges, uh, we experienced over the summer. I'd like you to start off just by sharing a, [00:03:00] a bit of your background, uh, and how you got to be doing what you're doing now.

Jorge Rossello: Yeah, absolutely. Um, so a bit of my background, you know, as mentioned, I'm a Managing Director on our LP Secondaries team here at Future Standard. Um, I joined the firm about nine years ago, I've been solely focused on secondaries investment during my time with the firm, uh, and how I got into the market. Yeah, I joined in 2016 when annual secondary volume was only about 40 billion.

So have seen tremendous growth over that period. That was a big reason why I wanted to get into this space. I thought it would be, uh, you know, getting in near the ground floor on a, on a very high growth opportunity set. Didn't quite expect the amount of growth we've seen, uh, but really think it's an interesting space because there are a lot of inefficiencies in the market that you can take advantage of, especially if you find yourself at, at a nice platform. And so really what excited me about the opportunity [00:04:00] set think it's, uh, a unique place to be in in the broader private equity landscape. 

Alan Flannigan: And, you know, when you think about applying, you know, secondaries within the private equity market, obviously a a, a major part of it is, you know, having a good strong view on that market holistically and what it offers to investors.

Obviously secondaries is a more unique way to access it relative to what some are familiar with on the traditional primary side. Uh, but when you think about private equity investing more generally, you know, what is the value proposition that stands out to you for investors? 

Jorge Rossello: So within private equity more generally, I think there's a few, a few key things that stand out for me for investors, especially looking to get into the asset class for the first time.

 You know, first and foremost from my perspective is, is performance. And the potential for outperformance, right. It's, it's generally a more illiquid asset class. You should be expecting a premium in terms of performance relative to public equities and other [00:05:00] asset classes that are out there that most investors have exposure to.

And over time we've seen that thesis bear out. So I think first and foremost, that's, that's the most important. Another one I would say is diversification. Especially going along the themes of more concentration in public markets that we've seen, more capital getting concentrated in certain parts of the market.

Uh, having exposure to private equity simply provides exposure to different types of businesses, different industries and different strategies that otherwise investors are not able to access. Uh, and then I think the third component of what makes private equity compelling is downside protection and risk mitigation.

 You see in private equity, historically, we've seen lower levels of volatility in returns over time, and I think that's particularly important when you see the volatility that we've seen in public markets at times this year. Now performance has generally been positive, but there have been significant pullbacks in [00:06:00] certain periods, especially earlier this year. So I think having that lower volatility in your portfolio, that's really what private equity can bring. 

Andrew Korz: Yeah, Jorge, and, and, and maybe digging a bit deeper, uh, and, and sort of going into secondary specifically, you know. Getting exposure to your point, to private equity isn't quite as simple as going and buying an ETF, uh, or a mutual fund.

You know, there are, there are lots of different ways to access, uh, you know, the private equity market and those benefits that you mentioned. Uh, you know, there's investing in primary funds, which is probably again, what, what most, what most folks are familiar with, you know, committing capital to PE managers, you know, new buyout fund, they call your capital, they go invest in companies.

Um, you know, there's co-investments where you're investing along, uh, you know, a GP in a single company. And then there's secondaries where, uh, you, you have expertise where you're buying interest in an existing fund or an existing pool of assets. Talk to us from your perspective about the importance of not just the strategy and the benefits of, [00:07:00] of, you know, private equity strategies, um, but also how important it is to understand and think about the different ways of accessing that strategy.

Jorge Rossello: You know, from the perspective, especially of an individual or an organization who's looking to access private equity for the first time or is early on in, in kind of its exploration of the asset class, you're absolutely right, Andrew. I mean, you can, you can make targeted commitments to specific general partners.

Uh, you could co-invest or seek to co-invest in opportunities. But I think what you're going to have with that experience, right, is you're going to end up with a more concentrated bet on a small number of managers. And your mileage may vary in terms of what your ultimate returns are going with a strategy like that.

You know, comparing and contrasting that more targeted approach with investing in something like secondaries, the real benefit of secondaries and why we've seen so many institutions, so [00:08:00] many individuals choose, uh, secondaries as an entree into the general asset class is the high levels of diversification that you get with the strategy, right. If you look at secondary funds generally, you're going to have exposure to many underlying strategies, many underlying general partners. I think what's interesting as well is if you're making commitments from now going forward into private equity funds, you're only getting exposure to those deals and those companies that are going into those funds from 2025 onward. In secondaries, it's great because you can go back in time, get exposure to transactions that happen...2017, 18, 19. And so that's what we call back vintage year diversification as well within secondaries. So it's a really great way to enter the asset class. And, and as a result of that diversification, we've seen much lower loss rates within secondary funds than what we've seen broadly in private equity, which is a great benefit.

Alan Flannigan: And Jorge, I'm, I'm [00:09:00] glad you mentioned it. You know, the, going back in time to sort of backfill, one of the, one of the things I always talk about is like, it is very hard to stay committed to a long-term, you know, private equity allocation plan where you're committing to, you know, a certain amount of vehicles every single year and building up that exposure through primary funds like most institutions do, mm-hmm, and creating that glide path where you ultimately land the plane where you wanna be.

But what secondaries provide, especially when complemented in more of an evergreen focused portfolio with co-invest and, and other fu, fund strategies that have these unique blending characteristics; it really, kind of, serves as almost like a wormhole porting through time from, you know, the start of building your primary fund private equity program to that ending point, you know, 10, 15 years later where it's scaled, diversified across strategies and managers, and you've got more of that cash flow balancing back and forth in and out of the portfolio.

Jorge Rossello: Yeah, that's a great point. And I mean, you know, you think about secondaries [00:10:00] and, and what's unique, especially in the context of an evergreen fund, right. It's, it's a great strategy, to your point, Alan, on, cash flow management, mm-hmm, and ability to invest in private equity in a way where you should start seeing distributions more quickly, or at the evergreen level, you start having distributions more quickly that you can then redeploy into new opportunities and continue to compound those gains.

So that's why secondaries are such an important part, and a big focus for a lot of evergreen vehicles out there. There's nothing else like it that will give you the ability to have those cash flow characteristics. Uh, and again, that back vintage diversification. So it's certainly, you know, I, I think an important part in the core holding, for a lot of those strategies as well.

Andrew Korz: Yeah. I mean, you think about, what are the challenges that a, especially a new investor in private equity has. Mm-hmm. Number one, they're gonna have to wait a long time to get their money back, and number two, they're gonna have a hard time unless they have a ton of capital building a, you know, an appropriately [00:11:00] diversified portfolio.

Mm-hmm. Secondaries are a great tool to kind of help, uh, mitigate both of those, those issues. So I wanna bring this forward to some of the topics that we talk about in our, our Private Markets Outlook that was released, uh, about two months ago now. Um, and we, we, sort of, walk through what, what we, sort of, see as the defining trends of today's, uh, private markets investing era, right, which we sort of think we're in a new, uh, a new landscape here, sort of post-COVID. 

Um, and the first one we talk about is, uh, capital concentration, right. And the, the impact that scale, uh, has on, on performance. So, you know, obviously that's, that's, that's one of the, the core themes we focus on. And, you know, unlike in public markets where concentration is historically high. You mentioned that earlier in a few large tech firms. Here, we're really talking about concentration within, uh, certain segments of the market, right, that are receiving a disproportionate amount of the capital flows. Um, and just to sort of put some, some numbers around that for [00:12:00] folks, in the first half of the year, 42% of global private capital fundraising went to mega funds, right.

So funds that are 5 billion, uh, $5 billion or, or larger. Uh, five years ago that was 23%. So almost a doubling in terms of the proportion of capital that's going to these mega funds. Um, and that trend is way more pronounced, uh, in your part of the market in U.S, private equity where 60% of the capital in the first half of this year, uh, went to just eight funds, right.

So, the point we really try to make is that this is a trend that's been going on for a long time. We've tracked it through time. Uh, but it's been accelerated by sort of the post-COVID macro volatility market challenges that we've seen. Um, you know, investors, I think as a result of those are prioritizing commitments to the largest managers, the largest strategies where they, they sort of sense this, this, um, you know, this sort of quality or, or safety.

Mm-hmm. Um. In reality, what we see is all this capital is sort of congregating at the top end of the market, [00:13:00] looking to buy larger and larger companies. But there's only so many of, of these companies, uh, to be bought and, and sort of of these deals to be done. So you get heightened competition, you get higher valuations. Uh, you get what we're seeing recently, which Alan has talked about a lot, which is the increase in, in take-privates, because you've gotta keep going, you know, up market and more up market to, to, to do bigger and bigger deals. Um, and we sort of question whether that's gonna work out from a performance standpoint for that segment of the market.

So I guess first, do you share our sentiment on this, on this topic? And second, how do you think about sort of concentration within the private markets and its impact on, sort of, you know, go forward returns? 

Jorge Rossello: Yeah, I, I certainly share, you know, your views on that topic and, and capital concentration in general, right. And in the private markets, and, and particularly in the institutional market as well, the saying has always been, you won't get fired for choosing name your mega-cap sponsor, right. [00:14:00] It's, it's the illusion of safety. It's the brand name and why it's congregating in that space. But to your point, just naturally when you have more capital attacking the same opportunity set it, it not only leads to elevated asset prices at entry. Mm-hmm. So, you know, it makes it more difficult to generate return when you're having to compete and you're having to pay up for those assets. You know, one thing we've seen it do over time as well is it creates strategy shift at some of those managers who have to employ, I would say, unnatural strategies to get that capital to work. Mm-hmm. So either that's going up significantly in transaction size, right. If you look at a general partner's track record and the way they generated their returns and the assets that they were buying when they were generating those previous returns, mm-hmm. 

Do you have the same level of comfort that, now that they've grown so much and aggregated so much in assets, that they're going to be able to do the same thing at a much larger scale. So definitely agree on that point. And then, you know, interesting on the [00:15:00] take-private point, and I'm sure we'll get to this as well, is, you know, I think what the future holds for private equity is where returns are going to be generated is not from, you know, relying on what worked over the last 12-plus years. Mm-hmm. It's from truly professionalizing businesses, improving operations. And I think it's difficult to make the argument that you can take a very large publicly traded firm and improve the operations that much. You would think they're, they're already operating pretty well, yeah, given what they've achieved and where they sit in the public markets. 

Andrew Korz: And, and, and slap a 30% premium on top of the valuation that the public market gave it to. Exactly. Yeah. That's right. 

Alan Flannigan: And Jorge, you touched on this earlier in your, your, you know, close to the intro comments, but, you know, why do you wanna buy private equity again? It's that, you know, additional growth through operational improvement, the value of that control-oriented premium, it's diversification to expand access into parts of the market that you can't get easily elsewhere. And then it's, you know, typically better prices, better [00:16:00] valuations for taking on the liquidity and for, you know, keeping your capital locked up for an extended period of time.

And when you stack that scorecard up against, you know, these take-private transactions, which are now, you know, in excess of 50% of, uh, of buyout deals in the U.S., you know, better growth from operational improvement again, you know, large publicly traded company. Management's, probably not, you know, terrible. Maybe there's some improvement to be done there. Yeah. But, you know, diversification in terms of getting into a market you couldn't get, well, you know, yesterday I could have bought those common shares at a 30% discount to what, uh, you know, my manager just paid for them today. Mm-hmm. And, you know, in terms of the better price, you know, you're buying into a public market that again, you know, valuations are pretty high.

Uh. Just asked Jerome Powell, he commented on that yesterday. Um, you know, and so there is that question of like, does this, kind of, stack up and meet the mandate of what, you know, folks are really asking of their private equity managers, which is to go out and get those companies that are diamonds in the rough that have, you know, a real delta between how they're [00:17:00] performing today and what they could do with best-in-class practices. So, you know, to me it, you know, seems like a little bit of a deviation from the mandate. 

 And so, when we think about concentrations effect, you know, in secondaries, you know, something that we've seen is, you know, a pooling of dry powder amongst the largest, uh, GPs, perhaps even more so on the secondary side, mm-hmm, uh, relative to the market size is what we have in the primary side.

 You know, and Jorge, I'm, I'm interested to get your views in terms of how that concentration, you know, shows up in the market, um, you know, and, and what opportunities it, it, kind of, leads to for other players. 

Jorge Rossello: Absolutely. I mean, we certainly see that in the secondaries market with funds getting larger and larger, having funds now that are 20 billion, $30 billion in size, it's, mm-hmm, it's a scale that I think certainly if you go back 10 years ago was unthinkable, mm-hmm, in secondaries. Uh, the way that, and Andrew alluded to it before, right. With fundraising, [00:18:00] uh, over the last year, you know, nearly 60% going to the top, you know, handful to, you know, five to eight firms really, um, you know how that shows up in the market.

I think it's a big reason why we've seen record volume this year, mm-hmm, right. You have all that capital chasing the opportunity set, not even necessarily counting the leverage that they might be using to acquire those assets or the leverage that they have at the fund level, mm-hmm. Um, what that's doing is it's creating competition at the top end of the market for the very largest portfolios, right. It, it used to be very rare to see a billion dollar portfolio trade in the secondaries market.

And, and just this year alone, we've seen a, a handful of multibillion dollar deals. There are funds out there whose average deal is north of a billion dollars. Mm-hmm. And so what it creates is a supportive pricing environment, right. There's more capital chasing those opportunities. If you look at broader market reports in secondaries, they're gonna tell you that, you know, [00:19:00] buyout funds are trading in the mid-nineties. Mm-hmm. You know, single-digit discount. Um, is that sufficient to generate the level of return we've come to expect from the secondary market at large in the past? Mm-hmm. I don't think, alone, it's enough to, to really generate that, that expected return.

So, I, I think it's compressed discounts that are out there more broadly. Mm-hmm. But on the flip side, you know, and I think, uh, what's beneficial from my perspective is that it creates so much opportunity to go out there and to try and attack and to try to find, you know, that equivalent of a diamond in the rough on the secondary, uh, market. 

Andrew Korz: Yeah. And I guess, you know, if, if, uh, if all this, this capital being pooled at the top end is sort of driving pricing up in, in sort of the larger transactions, you know, hypothetically one way that, that those, those players could, uh, you know, get, get returns back up to where they, you know, would like them to be or where their investors expect them to be is to use leverage, right.

Yeah. And that's sort of the [00:20:00] second big component we focus on within our Private Markets Outlook, which is, uh, the normalized interest rate environment, right. Um, so I, you know, I realized we're recording this exactly a week after the Fed, uh, cut interest rates by 25 basis points and, and sort of signaled that there's more to come.

Um, but, you know, beyond sort of the short term, we, we firmly believe that we're not going back to the, call it 2010 to 2021, interest rate backdrop. Um, you know, obviously, there's a lot of uncertainty around Fed leadership and who, you know, uh, who the next Fed chair is gonna be in politicization. But I think if we take a step back, we are in a different interest rate regime than we were during the last cycle.

Uh, and the case we make is that, you know, this, this presents a new set of issues for private equity, right. Particularly those managers who relied heavily on leverage, uh, and for, sort of, this market-wide beta driven valuation expansion that we saw, not only in private markets, but certainly in, in public markets as well.

And you know, in a way I sort of think of [00:21:00] higher rates as a sort of clarifying agent within markets, right; where they're supposed to be, at least. Uh, I, I think, you know, to drive strong returns over the next cycle, mm-hmm, you're gonna need to do what private equity managers say that they do, which is to improve the company, to grow revenues, to make a creative acquisitions, to expand margins.

Uh, as you sort of mentioned before, the sort of meat and potatoes of running a company, well. Mm-hmm. Um, you know, obviously you're not necessarily in the day-to-day operation of these portfolio companies, but as you sort of look at it from a more macro perspective and, and you're sort of. Uh, you know, analyzing these, these fund managers. Uh, and you think about how this, how this, uh, sort of, evolves into this new era for capital markets. How do you express this sort of, uh, you know, this, this premium that's being put on operational value creation, uh, within the secondary market specifically? 

Jorge Rossello: Yeah, it's, it's a good question and I think, you know, if you are building a very diversified [00:22:00] portfolio and, and I would say the secondary market tends to be a little bit more opportunistic. Mm-hmm. It's difficult to exactly target this, but I think a couple ways you can do it are having, you know, a focus on middle market, lower middle market sponsors. Right. I, I think that's certainly where we focus and where we find that that's where you get true operational value-add. Um, you need to have that lens of not only a secondary investor, but a primary investor and understand, dig into that sponsor's track record, understand what was driving returns in previous funds. Right.

And I think, you know, it's interesting, sometimes we see, you know, we're, we're saying multiple expansion. You can't rely on that going forward. But what's interesting to me is that in the lower middle market and middle market, a lot of times you do see natural multiple expansion. Yeah. Because those sponsors are taking those businesses that maybe were 20, 25 million in EBITDA at entry.

Mm-hmm. They're bolting on new businesses, creating real scale. Uh, and [00:23:00] that itself is leading to, you know, higher quality assets that should trade at a premium given the growth profiles, uh, and given the scale of those new businesses. So I think there might still be multiple expansion in that part of the market, right.

And that's more of a factor, uh, of, of those sponsors coming in, improving those businesses, scaling those businesses. Uh, and you still might see some of that, but I think that is much harder to achieve at a much larger transaction size, a much larger company size, when you probably already bought in at pretty premium valuations and you didn't buy well.

Uh, usually what we see in the lower middle market and middle market is good entry points, good buying points. Mm-hmm. Uh, and then improving those operations and being able to sell for, for premium valuations. 

Andrew Korz: You, you're not gonna get saved by market beta in this new era. Right. I think is, is, is is a safe thing to say.

Jorge Rossello: Yeah. Yeah. And it's, it's, right. It's interesting and that's, that's why we have the opportunity set that we have had in secondaries over the last three years, and that's why we've seen growth is [00:24:00] because you have a mismatch of prior vintage funds who were operating in the zero interest rate environment.

You have new funds that have been raised in the new interest rate environment. There's just a fundamental mismatch between those vintages of funds. And where the new funds are able to price assets and what kind of leverage they're able to put on those assets and where those existing funds are holding those assets. So, as a result of that, right, you've seen less distribution activity, and that's why there's so much interest in secondaries because there's a real need for liquidity out there. 

Alan Flannigan: And Jorge, one of the ways that, you know, folks are accessing secondaries, uh, especially new investors, individual investors in particular, but you know, also smaller institutions, you know, is tapping into, you know, the emerging private equity evergreen fund space. And, you know, as somebody who covers this space, you know, pretty closely, something I'm always amazed by is how, you know, different a lot of the strategies across the space are not just in terms of, you know, [00:25:00] size and that sort of thing, but also the blending of different strategies, uh, within those funds. And I think it has a real outcome for, for performance and investor experience.

And, you know, one of the practices, you know, we kind of bucket, uh, you know, styles into, you know, kind of a, a punt square of strategies in some of the research that we put out. And one of the squares on that strategy is one where, you know, the manager focuses specifically on, you know, utilizing the secondary market to build their portfolio, but with a priority on identifying positions that can be acquired at a significant discount, uh, to the fair value that they're currently being held at.

And you know, what that allows for that manager to do is to, you know, write up the value of that position to the fair value that the GP held it at, you know, upon that position entering the fund. And so what you typically see is you know, returns very, very strong, you know, in that initial period. But, you know, it may not be something that's sustainable and [00:26:00] persistent.

Mm-hmm. Um, you know, obviously you're in this market, you know, you see some of these deals being executed and, you know, I'm curious to get your take. This is, you know, something that's been covered in various financial news outlets and certainly we've spoken about, uh, at length. You know, what's your view on this practice and why it's done? Yeah. What are, kind of, the, the pros and cons, you know, we'll try to be, to be evenhanded here, yeah, of that sort of practice? 

Jorge Rossello: Yeah. Yeah. That practice is interesting. We've seen it, you know, in the evergreen space. We've also seen it in the drawdown space prior to, you know, a lot of evergreen funds being launched as well, and, and there are some groups that have done well with that strategy. And, but I would caveat that with they've done well with that strategy in a period of zero interest rates, right. Uh, where basically what you're doing in those instances is you're going after funds that are probably tail end, right. So they're 12 plus years old. Mm-hmm. Maybe there's one or a few companies remaining in those [00:27:00] portfolios.

The general partners might not be of the highest quality. Uh, you're able to buy those for, you know, something in the sixties or in the seventies, and you get to write that up to par the, the day after you close, which looks good. Um, my, you know, my caution would be it looks good until it doesn't. Uh, and I think we're in a phase now in evergreen funds where a lot of new entrants are coming to market. A lot of these platforms are scaling, right. So it works while you're scaling and you continue to raise capital. But in terms of driving durable long-term performance, when these vehicles get to appropriate scale, relying on discounts and secondaries and picking up assets on the cheap, mm-hmm, simply is not going to work over the long term, right.

So essentially you're hope, you're hoping that those sponsors can exit those companies that have been in those funds already for 10-plus years in the near term, so you can get your capital back and redeploy. And I think given where we've gone in the interest rate environment, mm-hmm, [00:28:00] it's going to be more difficult for those assets to trade because generally what we're seeing gets sold, uh, is higher quality assets. 

Alan Flannigan: And I, I think that leads into something, you know, that I've discussed before on the podcast, which is, you know, this risk of those strategies having stranded assets and, you know, a stranded asset for this purpose is really just a company that's still being held within a GPs primary fund.

Maybe the fund has reached its fund term. Uh, there's not been liquidity provided on that asset. You know, in some cases those assets may be, you know, significantly older than, uh, the fund term. Mm-hmm. There's a question of whether they're still getting accurate marks even. Yep. Um, you know, how prevalent is that, you know, an issue within the market, you know, because the way I think about it is, you do a bunch of these deeply discounted kind of tailwind secondaries, you get the immediate pop returns look good, folks are happy. Ultimately, you need to bear fruit over the long term. And that could be difficult if you gradually accumulate over time a [00:29:00] bunch of these, you know, positions that maybe are just stranded in place and there's not really much, you know, hands-on value-add that's still being done; let alone, you know, getting a fair and accurate mark on the portfolio.

So, you know what, how do you think about that risk? I think, you know, both in general, how pervasive of it is, is it an issue within the market? Then how do you think about it as a portfolio manager in secondaries when you're assessing deals and the quality of the general partners and their ability to get that capital back to investors?

Jorge Rossello: Yeah. In, in terms of how pervasive it is, I mean, I think it's a bit of a, a dirty secret of the private equity industry that especially, you know, in the drawdown space with those funds. When you sign up for those funds, you're told 10-year life. Uh, but a lot of them will be dragging on for 15 years plus for exactly some of those reasons that you listed, right. You have assets that, uh, have not performed or might be stuck in funds or are unable to be sold.

You also may have a situation... we've seen plenty of these situations where you [00:30:00] look at a portfolio of funds that are tail end, they're older. Mm-hmm. Uh, the fund might not be in the carry. Right. So you're missing that form of alignment with the general partner, where, mm-hmm, if they were in the carry, they would be incentivized to maximize the value of that holding and liquidate it so that they themselves can have a nice payday. Uh, so that's something when, you know, we will opportunistically look at scenarios like this. Usually when we have an angle in terms of relationships with the underlying sponsors and general partners.

Mm-hmm. And what we like to look at. We like to see that the underlying general partners are going concerns, right. Mm-hmm. They've raised subsequent funds. Uh, they're a successful franchise still, because sometimes you do run into those situations as well where the general partner hasn't raised a subsequent fund, right.

Then you get into the question of what are the valuation practices here. Uh, you know, you don't have a track record on the go-forward, so how close, uh, of attention are you paying to this asset and the [00:31:00] valuation of it. Mm-hmm. Um, so those are a few things that we try to look at when we're reviewing these opportunities.

We wanna make sure that the funds are performing, that there's a reason why the companies are still within those portfolios. Mm-hmm. And then it's just down to doing the fundamental underwriting of understanding what's the true value of this business. Where do we reasonably see it trading in the future? Uh, and usually for us, that ends up being that, you know, we can't price the opportunity in a way that will make us competitive or we just don't have interest to begin with. 

Alan Flannigan: Jorge, that's, that's great insight. It, it's, it's an issue that I've been thinking about quite a bit and, you know, really curious to get your perspective. So thanks for, you know, a pretty candid response on that issue. Yeah. 

The, the third and final, um, you know, primary theme of the Private Markets Outlook that we touch on is investing through uncertainty, and that was certainly a theme, as we talked about in the intro, toward the first part of the year, uh, with, you know, the tariff announcements, a lot of disagreements with friends and adversaries alike, uh, and a question as to what the new world order that was [00:32:00] forming beneath our feet would look like. And that really put a paucity on deal activity, you know, certainly over the summer.

We've seen that come back here in recent months as the, you know, cloud of uncertainty starts to wane a bit. And, you know, it's got folks a little bit more optimistic now about deal activity through the end of the year. And you know, Jorge, you went through that period of uncertainty, certainly where people were kind of frozen on the sidelines a bit, but it, it feels like the ball is, you know, starting to roll down the hill. Uh, you know, what are you seeing in the market, you know, and what are you hearing from industry participants and you know, what really gets you excited in terms of opportunities that are out there, uh, to close the year?

Jorge Rossello: Yeah, I mean in terms of what we are seeing, at least on the secondary side is, is record amounts of volume, right. And we'd noted it earlier, the first half was over a hundred billion. That was growth, uh, of I think 70%-plus over the first half of last year. And so expecting generally the secondaries market to show growth of 30 to 35% this [00:33:00] year.

So there is a big opportunity set out there, you know, what we're seeing get done in certain transactions, um, you know, it's not something that we can reasonably see ourselves underwriting to. We're seeing a lot of very high pricing, uh, on portfolios that may include brand name sponsors, well-known groups.

Uh, I think buyers are, are generally thinking that they're relying on quality and secondaries as well, and buying assets for very thin discounts. And generally what we're hearing across the community is that expectation for exit markets to open up, mm-hmm, for valuations to increase, for distributions to start really coming back into programs. And from our perspective, it is just not, you know, a macro bet that we are really willing to take on when we're looking at opportunities. So I'd say what's interesting for us this year is we've remained very highly selective in what we've brought into our portfolios and into our funds.

Uh, we wanna find situations where the fundamentals of the underlying businesses [00:34:00] get us excited. Where we think those businesses will continue to perform, whether there's an improvement in the exit market or not. And we wanna feel good about holding those underlying exposures, right. Because if you end up in a situation where you were relying on a company to get sold in the next year, year-and-a-half, and that doesn't happen. Mm-hmm. Um, you know, does that impact your base case underwriting? And so those are the situations that we try to find where we're getting good relative value, interesting entry points into these opportunities, uh, and generally finding that we're able to find great exposures at, at below-market pricing.

Andrew Korz: True. 

One question that I was gonna ask you

 especially around the secondaries market, you see this sort of, uh, you know, binary, uh, sort of posed potentially a false binary where, you know, if we do see, because I think we do expect mm-hmm, you know, deal activity to continue to improve if, as interest rates come down and as hopefully we get more policy certainty around tariffs and, and, you know, other parts of the administration's, uh, you know, uh, sort of [00:35:00] activity.

Um, so to the extent that we get this, this sort of increase in activity and, and improvement in the exit uh, environment. Um, do you see that as a negative for secondaries volume or are people misunderstanding sort of the core utilization of the secondary market for both sellers and buyers?

Jorge Rossello: Yeah, no, it's, it's a great question. Okay. I mean, because secondaries really came of age post-GFC.

Yep. And right, you started to see more market activity because of the dislocation that happened there. But what's really evolved over time is that those sellers that sell when they really need to, and we tend to see that they become repeat sellers. Right. And, and what secondaries has really become is just an active portfolio management tool for institutions out there in private equity, uh, just as we would see in the public markets and across their other allocations, across asset classes. So that continues to be one of the primary reasons that people [00:36:00] come to the market and sell interests, is because they're just trying to actively manage their portfolios.

I wouldn't say that we're seeing a lot of institutions that need liquidity or are in financial distress. Uh, but they certainly are motivated at this moment and I don't think that goes anywhere, just looking at how much capital has been raised in private equity, generally over the period of the last five to 10 years.

Alan Flannigan: Well, Jorge, thanks for walking us through, uh, what's been an exciting year in private equity, uh, and especially through your lens on the secondary side.

Uh, you have a unique perspective on the market and we're really grateful for you bringing, uh, your experience to the table and sharing it with us today. 

Andrew Korz: Jorge, that was awesome. We really appreciate the time.

Jorge Rossello: Likewise, thanks for having me on. 

Alan Flannigan: Terrific. Thanks Jorge.

[00:37:00] 

Alan Flannigan: Well, Andrew, that was an exciting conversation with Jorge Celo from our LP, uh, Secondaries team. Um, you know, shared a lot of experience, uh, throughout, you know, the development of the secondaries market evolutions in terms of activity this year. I'm really curious, Andrew, what were your big takeaways from the conversation?

Andrew Korz: Yeah, I mean, that, that was an awesome conversation. Jorge's an an absolute expert, uh, in the space, not only in secondaries, but I think he provided some really nice, uh, takeaways around, you know, how private equity investing is changing, mm-hmm, you know, across the board, which we talk a lot about in our, our Private Markets Outlook report.

I think, you know. Two of the things that I really wrote down here that I found really interesting. Number one was his point on valuation because we've talked about, um, you know, the extent to which valuation expansion really drove, helped drive returns, mm-hmm, within private equity. And, and to be clear, within public equities too, during certainly 2010s and, and [00:38:00] up sort of through 2021.

And, you know, I think it's important to add a little bit of nuance to that conversation. Mm-hmm. Uh, you know, valuation expansion certainly can be, uh, a product of, you know, a macro factor, like low interest rates, right, mm-hmm, that sort of help drive this, this, as I mentioned, it's sort of like beta driven, market wide, mm-hmm, expansion, right. Uh, I've talked about it sort of like putting a two by four on sort of the base layer of the market, mm-hmm, lifting everybody up, right. Um, this sort of horizontal value creation from, from, from valuation expansion. Um, but I think the other way you can drive that is by making the company better, right.

Mm-hmm. And, you know, outside investors, as you're selling the company, see, uh, a company that's growing faster, that's more stable, that's larger, mm-hmm, that's more scaled, that's more diversified. And that's another way that, that, that, you know, a, a company can fetch a premium, right. Mm-hmm. So, that's the type of valuation expansion I think that we can expect in this new era. We're not saying there's gonna be none. We're just saying, um, [00:39:00] you know, the drivers are gonna be different, mm-hmm. And maybe the segments as well, where you're much more likely to, to add value in terms of scaling up a company and diversifying a company's business lines, mm-hmm, in smaller companies than you are at the top end of the market, right.

And the second thing that I really, sort of, found interesting was his talk about incentives, right. And, and as, capital concentrates at the top end, which we, we've talked so much about. Mm-hmm. The incentives start to change, right. It, it starts to become really, really important to just get capital deployed.

Yeah. Yeah. Right. And I think as investors, we need to be honest that, that, you know, uh, incentives matter, mm-hmm, when thinking about managing a portfolio and, you know, as you're, as you're thinking about, you know, allocating to different managers or different segments, it's important to think about that.

And the other thing, you know, as, as a secondary investor, when he was talking about, you know, thinking about, look, if, if, if, if a GP is not raising another fund, are they still marking these, these assets, you know? Yeah. Um, how, how trustworthy are they? All these things, you know, sort of thinking [00:40:00] about the psychological side of the investment world. I th I, I thought that was really interesting, but gimme your takeaways. 

Alan Flannigan: Yeah. I mean, we hit on it in the first segment, but the capital concentration, it, it constantly amazes me, and it shouldn't because we're looking at this issue all the time. But the, you know, 60% of the really top handful of secondary buyers accounting for 60% of the volume of se, private equity secondary deals, yeah, uh, thus far this year.

And we see similarly, you know, the top eight, uh, secondary buyers holding 50% of the dry powder. And you think about the share of the overall deal volume in the market that they're doing. You know, everybody in private equity likes to talk about how they're very selective when it comes to deal deployment.

The funnel, the funnel, everybody, everybody has seen the funnel and it's always narrow at the bottom. Well, you know, when you're taking down 20% of the entire market in terms of deal flow at the end of the year. Yeah. That doesn't sound like a very narrow funnel [00:41:00] to me. No. And so I think it's to your point about incentives, you know, getting the money to work as opposed to necessarily finding those deals that are going to drive really strong performance, drive that carry in a significant, meaningful way, you know, which is what the underlying investor would appreciate, 'cause that means their interests are aligned. Uh, that's what the carries there for in the first place. Absolutely. I, I thought that was a, a great insight. 

 So, Andrew, that was a great episode. Uh, thanks again to Jorge, uh, for his time and expertise, uh, in joining us. Andrew, brilliant insights as always. Uh, thanks for, uh, everything you do for the research team.

Andrew Korz: That was a lot of fun. Uh, and it's a, it's an interesting market environment right now and I think Jorge helped, helped us distill it down and, and simplified it a bit for folks. So, uh, really appreciate his, his insights. 

Alan Flannigan: Yeah, of course. And that concludes this episode. Uh, thank you for joining. Uh, please check out the Private Markets Outlook @futurestandard.com\insights, or click the link in the show notes.

Thanks.

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