Episode 179 - Marks on the Markets: Private Equity & Secondaries Outlook with Andrew Behrman & Chris Kim

 

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In this episode of the Faith Driven Investor Podcast, Richard Cunningham, Andrew Behrman, and Chris Kim discuss the private equity world and the secondary market.

They explain that private markets offer unique benefits such as diversification and active involvement but also come with trade-offs like limited access and illiquidity.

The conversation focuses on the secondary market, which allows investors to offload their positions in private funds. They discuss the recent growth of the secondary market and its importance in providing liquidity in a time of lower distributions.

All opinions expressed on this podcast, including the team and guests, are solely their opinions. Host and guests may maintain positions in the companies and securities discussed. This podcast is for informational purposes only and should not be relied upon as specific investment advice for any individual or organization.


Episode Transcript

Transcription is done by an AI software. While technology is an incredible tool to automate this process, there will be misspellings and typos that might accompany it. Please keep that in mind as you work through it.

Richard Cunningham Welcome back, everyone, to another episode of the Faith Driven Investor podcast. A joy to have you with us for what will be a Tuesday, September 3rd marks on the markets edition of the Faith Driven Investor Podcast, releasing this episode one day later from our normal Monday cadence in celebration of Labor Day. And speaking of Labor Day, man, it is hard to believe there are only four months left in 2024. To our Northern Hemisphere friends, hope you have had a wonderful summer to everyone out there. Hope back to school and the beginning of a new semester and your rhythms is in a sweet spot for you and your loved ones. One final housekeeping item I want to make note of is we don't have our mainstays, Luke Roush or John Coleman and the FTI Podcast Studio with us today. They've got a dense travel schedule going on, but not to worry because we've got an unbelievable amount of firepower with us in the studio for this March on the markets episode, and Andrew Behrman of Sovereigns Capital and Chris Kim of Argosy Strategic Partners. Gentlemen, welcome on to the podcast. Great to have you guys with us. 

Andrew Behrman Thanks, Richard. So exciting to be on. And, obviously you've been a fan listening to you guys from afar. So it's really exciting to be, here with you and Chris. 

Chris Kim Yeah. Same here. I'm really honored to be here to appreciate it. 

Richard Cunningham Well, thank you guys for your time. I'm excited that the listeners are going to get to hear from you all. So normally, gentlemen, on the way, we do a mark's in the markets episode, naturally, we kind of spend time looking at public markets or the economy at large and things like that. But both of you are private equity investors, and so we're doing something a little bit different where we might get some of those macro thoughts here and there as they relate. But we're going to spend the vast majority of our time looking at the private equity world and universe. But given this is each of your first time on the face of an investor podcast, that would get some background, an intro from each of you. So, Chris, maybe we start with you kind of what kind of work are you up to? A little bit of your background in story? 

Chris Kim Okay, so I have the privilege and honor leading Argosy Strategic Partners. I founded in 2019, and we are a division of RBC capital, and they are an asset manager based out of Wayne, Pennsylvania. I don't even know where Wayne was when I started interacting with Argosy folks, but I do know king of them all. So I heard it was like right next to freshman. So I was like, okay, so I kind of understand where went that. But yeah, before that I spent some time at a secondaries firm, but definitely later on go into a little bit more what is secondaries and what it's been to. You know, what we're talking about with the private market. But outside of that I feel like every day is just either work or trying to, like, keep up with my two little kids. I have a four year old and almost two year old. And I think when I come to my desk. Man, I'm like, this is so much easier than at home. And I keep up with like, so bless my wife who is, you know, holding on the fort at home. But yeah, just going back to, you know, lady Irish street partner has been doing since 2019. We've got on our team to five now here in New York City. And hopefully we're going to keep growing the team. So and then spending a lot of time very much indeed because I feel like that's going to be the biggest component of our team going forward. And these are they absolutely fascinate me. So I don't know if against any am I just like as much anything more than happy to talk about defenses, the indoor contact? I don't know any out. 

Richard Cunningham So fantastic intro Chris. Thank you a lot to unpack there, but I love the shout out to the bride as I hope someday she's listening to this and feels affirmed by your commentary on her work. Andrew. What about yourself, man? 

Andrew Behrman Yeah. Happy to. So I'm originally from central Georgia. I went up to undergrad at, Georgia Tech. So proud. Yellow jacket, big week, zero for the jacket since everybody tuned in. So we're fortunately on top of the SEC this week because no one else has played other than their opponent Florida State. So taking screenshots now. So the last you go, I started off my career out of Georgia Tech and investment banking, actually at SunTrust right here in Atlanta, was working on what they call their acquisition finance desk at the time, really focused on underwriting some of these sponsored buyout deals from private equity firms. Didn't know that I end up in private equity, but before my analyst years were done, ended up taking a role over at Invesco large global asset manager on their alternatives and institutional strategy team. And, you know, corporate strategy focused on things like fundraising, product development and M&A strategy for Invesco to grow their alternatives business. But while I was there, I had the opportunity to, meet and report into John Coleman and was only a few years later, I think, March of 2021. I like to think I was John's first call. I might have been the sixth or seventh in actuality, but, I got the call about sovereign capital, learn the story, and was just so excited at the opportunity to join. So I came to the firm and helped us launch our Fund of funds complex back in the summer of 2021. And really, the focus for us is to find private capital investment managers that are part of the faith driven investor movement to invest behind and build a diversified portfolio for investors. So I'm out here now in Atlanta with my wife Ali and our son, Jordy James. We just moved back to Georgia. We've been on a kind of a hiatus, while I've been working at sovereigns. We've both managed to finish grad school, which has been a nice accomplishment. Between Barcelona, Spain and Wilmore, Kentucky, two very similar places, if you're familiar with either of those. And it's been an awesome journey. And, glad to be back here, at Home Base. 

Richard Cunningham There we go. Well, fantastic to have you both on. This is going to be a ton of fun. Great diversity of experience, as you can hear. And, Andrew, you mentioned that you are running the fund of funds complex at sovereigns. I think that's an important place to start. Let's do a little private equity 101. You're investing in a number of other private markets fund managers. So maybe, you know, I think people here private equity and they have some natural assumptions of it takes $1 million to get into it, or high risk or just feels complicated, has something to do with funds, but maybe kind of level set and set the stage for us here because it'll help Chris when he's talking about what the secondaries market is. If you kind of define the private equity or private markets investing universe for us a little bit. 

Andrew Behrman Sure. So maybe I'll start by just saying, you know, we're fortunate in here to have a leadership team that helps us run the fund of funds complex. So it's a great benefit to have John and Luke leading that strategy. Obviously, we have a team behind them now, obviously yourself, Richard, me and Jonathan, let's quickly break down the private markets broadly. So if you look at the global asset management universe, right. Everything under the sun as far as asset management is concerned, you'd see there's about $120 trillion under management broadly. Right. That's what BCG is. Global report little US scoping down to the private markets. You're really talking about a specific set of strategies that comes down to things like private equity and venture capital, private debt, real estate infrastructure and secondaries, which is somewhat of a mixed universe. Of all of the strategies that Chris will tell us more about and those strategies in kind of 2022, 2023, they represented about 14 to 15 trillion of that 120. Right? So meaningful, but still smaller in the grand scheme of, the asset management universe. So the big expectation there is that many investors, both institutional and retail, are expected to continue to allocate to these strategies for a number of reasons that we could get into. But by 2028, most estimates you would see out there would say that private markets are expected to be something between 20 to $25 trillion of total assets under management. So a lot of growth coming from that universe. Strategies. 

Richard Cunningham Great rundown. Yeah. I mean, the growth is significant. Momentum is significant. I like what you. Pointed out there about both institutional and retail investors kind of having their mind on the private markets. And Chris, that kind of slides over to you. So what is a secondary strategy and what is a strategic partners specifically up to as you think about kind of the private market universe, and where do you guys kind of carve out a corner in the market if you will? 

Chris Kim Yeah. So I guess to kind of go a little bit more into this whole private funds universe that I was talking about, that's around 14 to 15 trillion as the latest report. I think covering a lot of the other assets. One thing that really differentiates private fund universe and, you know, it can be a little different depending on the strategy within the private fund universe. But most of it I would describe as illiquid in the sense like when an investor goes into private fund, they are making some level commitment in terms of dollars and time, and they're going to lock up their capital with this manager and then managing to go out and execute their strategy. So if it's like a traditional buyout, I can go probably do you know buyout companies if it's infrastructure you're going after infrastructure assets, real salaries etc.. But unlike stock market where you could probably sell most of the time, whenever you feel like you really aren't in control, that you actually give up control of your capital to these fund managers, you trust them and I hope that they will deliver what they say now just returns that also to strategy and maybe other values that go behind there to go along with their strategy too. And with that illiquidity cost, I guess that was the genesis to secondary market. And it kind of started around in the 90s where, you know, private equity still was in traction, is gaining some momentum and some investors. A lot can happen in 10 to 15 years. So it's just a typical timeline that your money is locked up in these funds seems really long 10 or 15 years. But within that 10 or 15 years you don't wait till like the end. Is it like money back? You know, as they sell a company? These are paying distributions back to you as a limited partner. And the investor by a lot can happen, like I said, in ten, 15 years. So if you want to offload your position or your remaining value, you will have to access the secondary market. And generally as of today, the secondary market represents 1 to 2% of the overall private market. So if it's the 14 or 15 point that actually number works. It's like spot on to around 1%. The secondary market is on track to hit probably 140 billion plus in volume this year. So that tells you Jericho 1% and it's grown quite significantly. I would say just a little context. In the early 20 tens, like 2014, the volume was around 40 billion. So it's grown quite a bit. And to dive even a little bit more into secondary is just mainly three big buckets. One in the secondary world there's the general trade of LP interest, which is kind of example we've been talking about. If you're an investor and say so-called fund manager, you're a limited partner, and if you're also of interest, you're selling your LP interest to someone like us, our strategic partners, which is what we do. We mainly focus on the lower end of the market because, like I said, like 140 billion, big number, higher average transaction size. It's up to like 5 million. So we are like the real like lower middle market of the secondary universe because the average fund size in second is whereas a billion plus. It's pretty pathetic in the secondary universe. And we feel we are here in the lower end of the market because it's extremely underserved. Not many dedicated secondary buyers or a liquidy solution provider. So it's a lower than market and just talked about the markets are going to keep growing the private markets. We believe also they can keep growing. And that means probably most likely the secondary volume will continue to grow as well. 

Andrew Behrman Yeah. And just to your point there, Chris, I mean, if you look back to 2015, in the private markets, the total AUM or something like 5 to $6 trillion, right? So in just over 6 or 7 years, the markets more than doubled. So obviously that growth and trajectory of overall assets under management there, you'd expect there will continue to be a need for liquidity beyond the current macro forces of kind of lower distributions coming to investors and needing a solution in the form of secondaries to get that liquidity. But you mentioned something important about kind of the private markets generally that's kind of worth double clicking on. You know, in the private markets, they differ pretty substantially from the public markets by the form of unique benefits and unique trade offs that come to investors. Right. And so I'll start with the benefits. You know, there generally private markets have less correlation to the overall public markets. Right. So people generally think, hey, if I can get access to some of these other asset classes, if there is a public market drawdown, there's less chance that my private strategies will experience the same drawdown. And let's put some figures of that, you know, the expected kind of correlation for private equity to the S&P 500, something like .43. Right. Whereas in venture capital the correlation to the S&P 500 is actually negative. It's something like just negative 0.07. So it goes to show you that there's a real diversification effect of being in these strategies. So that's attractive to investors. There's also, you know, the form of active involvement that you can have when you invest in a manager that has direct control of assets through actual full ownership. In the case of buyout, for example, board representation back there is often in venture capital to help influence decision making and also an opportunity to kind of partner closely with management teams right to drive value. So all of that translates many times to investors kind of saying like, hey, there's an opportunity here in the private markets for higher returns potentially, and diversification of my overall book. But just as you mentioned, Chris, that comes with trade offs and the form of access is actually quite limited to some of these strategies. They have investment minimums many times that require relationships and regulatory considerations. And then you also have there's no real time price in private markets like we see in the public markets. Right. Often you need to wait a whole nother quarter before your fund or your investment to strike a value. And with that comes the consideration that you may not actually be able to get out of that investment right away. There's an illiquidity constraint in the overall private markets there. So worth mentioning that as it relates to secondaries. 

Richard Cunningham All right, Andrew, one of the things you said is that there's benefits and trade offs of accessing or being exposed to the private markets. And I want to talk real quickly about the performance side of things. Public markets have been on this just historical bull run. And I think the temptation is to believe, well, then private markets must be just taking it in the teeth. We've heard about, you know, VCs kind of struggles or re correction from 2020 through 2022 highs maybe real quickly just provide kind of a snapshot for the moment in time where we are from a performance standpoint, publics versus privates and things like that. 

Andrew Behrman Yeah, absolutely. So if you look at kind of the back two years, you'd see exactly what you've just articulated, Richard, a not much positive movement, if anything, just this slightly positive movement in private equity, what we call net asset values or valuations, compared to something like a 15 to 20% markup and the public equities valuations. Right. And if you zoom out though for a bit and say, okay, let's look at the back four and a half years, what you'd see is that private equity valuations have generally trended just about the same level of return as the Nasdaq and S&P 500. Right. So widening the timeline there matters. And then if you look at any rolling ten year period, the data would suggest that if we go back from literally this year all the way back to 2001, any rolling ten year period, there's very few where private equity has underperformed that of public markets. Generally, it's going to overperform or outperform over a ten year through the cycle type of strategy. And beyond that, it also matters a lot in private markets. It matters a lot who you pick. Right. And what I mean, there is that, manager dispersion is a real thing in private markets. It's also true in public markets. But what you would see is if you looked at the public market. So U.S fund kind of global equities, if you looked at kind of the bottom quartile of returns versus the top quartile, what you'd see is that spread is something like 7 to 9%, right. So 200 basis points of performance. So you can get from being in a bottom quartile versus a top quartile manager. So that's your manager selection window there. U.S core real estate similar story about a 6% bottom quartile performance 8% top quartile has over the past ten years. But then you go to private equity and some of these more private strategies. What you see is over the past ten years, the bottom quartile private equity performance is something like 2% and the top quartile is 23%. So imagine the level of outperformance that simply comes from picking the best managers. Now obviously that's tough to do. It takes a lot of diligence, takes intensive resources. But considerable difference there. And similarly, in non-core real estate, for example, what's often categorized as a private market strategy, bottom quartile -2%, top quartile 14%. So the kind of summary there is, you know, who you pick matters. And it creates an opportunity for outsized performance for manager selection. Right. And so that expertise of your underlying managers is going to matter. And then because of the level of active ownership that you can get from these private managers, you're going to be able to ensure, ideally, that the values of the managers that you're picking align with your own values, right? So you have a little bit more of an active role and who you're picking as well in the private markets. 

Richard Cunningham Great commentary, Andrew, and I'm going to do my best to kind of summarize where we are at the moment, just kind of in terms of the conversation, if you can't tell these guys are just a brain trust. It is fun to hear you guys riff on this. So you've got the private equity universe. And oftentimes, unless you are the one directly going to invest in underlying companies, startups or mature businesses, you're going to partner with a fund manager, Mr. or Mrs. Investor, and your title as you partner with that fund manager is a limited partner. And you guys stop me if at any point I'm venturing off course here. Chris, you pointed out in Andrew your. Just talking about the illiquidity side of it, that oftentimes these agreements are 10 to 15 years of partnership. Now, the upside of that partnership is the opportunity for low correlation to the public markets. Andrew, as you were just talking about, or the historical outperformance that private markets have displayed in private equity, venture capital, private credit, what have you across those different types of asset classes? Now, one of the biggest things though, with that liquidity constraint, yes, is the desire for outperformance. But also you get seven eight years down the road and you might say, hey, I need to offload this position. It's done well. It's possibly matured. Maybe it hasn't, but I can't hold on for the rest of the remainder of this fund life. And it'd be great if someone wanted to buy my position from me. In the same way you would go out and liquidate stocks in a public exchange in the stock market that just does not exist in the private markets. And so that's where secondaries have been introduced. And so I hope that kind of sets up a summary for where we are right now as we get into some of the commentary. Because Chris, secondaries are all the rage. It seems like as people are talking about, you're giving me a head shake back and forth and your humility. But as people are talking about the private markets and, you know, honestly, the run that the public equities have been on, you know, the climbing interest rates, some of the macro conditions that private markets have been dealing with that have led to a little bit of a recent drag on performance. People are really talking about the secondaries market. So what are you seeing right now. Kind of give us some of the performance commentary or maybe just the overall thoughts on where things are currently. 

Chris Kim Yeah, I guess secondary is kind of having a moment right now for the past one two years is definitely been. And I like I mentioned earlier, it's been growing, but primarily due to the lack of M&A activity, IPO activity, especially if you have any exposure to the private markets, you've probably or self or organization already, now that this report is coming in, has gotten a lot lighter. And so because of that, that's actually boosted the secondary, you know, along with the historic run that the public markets have been on. But the private markets have been quite a robust self, not just in way and also in M&A activity or IPO. So if you're invested in these private funds, you probably knows, you know, for next span of years. The past 510 years have been a lot of money back to and kind of I would say a lot of private investors, the way they manage a portfolio is that they are rarely just invested in just one private fund. You know, they're probably investing in a whole basket, a whole portfolio of private funds, and they're like, oh, I'm getting all these distributions. And what they do is they are committing to the general partners next fun. And their hope is that as they get these distributions, they can use that for a following commitments to the next funds by assets issues. And it has lightened up. But they've already made these commitments. You know they find themselves in this a little awkward in balance. You know lower distributions. But the outflows are now greater. That's one of the main reasons why secondary is just kind of having a own. 

Andrew Behrman Yeah. That's like an extremely important distinction. Right, Chris of like performance in the private markets versus public markets, the way it's recorded is actually quite different. If you're invested in a stock and you see on paper that stock is now increased in value by 20%, chances are you could sell it pretty soon and get something around 20%. You know, depending on the day and where the markets are and private markets, you see a couple of different types of markings, right? You see all managers recording what's called net asset value, which are what they expect. The fair value is of your investments at a point in time. And what you're articulating is that there's a difference between what value is recorded there on the paper and the actual cash that has been received by investors, what we call, DPI or distributions paid in. And so it's, I think critical to understand and as you mentioned like secondary is having their moment is, you know, many times that distributions as a percentage of the nav net asset value, it kind of hovers around something like, I don't know, 30%. Right. So people can kind of expect, you know, generally I'm going to start to recover some distributions and I can commit to new funds. What's kind of occurred over the past two years since rates have increased, exit activity has declined. And what we've seen is that distribution as a percentage of net asset value has declined all the way to something like 10%, a figure not seen since the great financial crisis, when liquidity was also obviously hard to come by. And so maybe, say a little bit, Chris, about how does secondary step up as a solution and that environment. 

Chris Kim Yeah, that's exactly what's happening Andrew, thanks for that. Where one of the main reasons why we're having our moment is that when distributions are going back down at ten, 15% a value, sometimes it breaks out when LPs are used to a 30% rate at distributions and it's not happening. The secondary groups can come in and help fill that gap. And you're basically taking the control away from the GP and back. As the LP is, is you're always rely on the GP to send back the capital to you, right? And it helps boost that DPI number. And in today's memo, it's hard to even blame the GP, the high rates and just all the macro factors that are going on like GP's, or are they just not happy with the prices that you get for their assets? They tell LPs, we got to wait longer. You know, it's hard to sell our remaining assets. So us LP goes, well, yeah I could just sell my position on the secondary market. So that's kind of like an interesting dynamic that's happening where the secondary market kind of in some way empowers LPs to have this other outlet of accessing capital. And because of that, what's happening there, there's also a greater interest, I would say, in the last few years for fundraising for secondary funds. It's probably no secret that fundraising has been pretty tough for most private funds strategies. All right. We use Pitchfork quite a bit, and I was looking at some of the pitch book numbers, and I noticed for their December 2023 figures for the last 12 months, they were all negative for all sectors private equity, venture capital, real estate that except secondary secondaries was up 65% in fundraising activity because people I guess LPs view secondary. So like this could be a moment where secondaries can come in and start buying up all these assets at probably an attractive price because something that I haven't mentioned about secondaries because of this illiquidity factor, there's also an illiquidity discount that comes into play. So when you're buying a value in and you talked about the net asset value, and a lot of times you price off that. In the end, more times than not most secondary transactions occur at a discount. Like if you own a Microsoft stock is trading X dollars. If you want to sell it, you get it probably at that X dollars with that, maybe a little spread plus or minus at probably $0.05 or something. But on the secondary market, if your position is worth $1, it's very rarely you probably can sell it for a dollar. You probably have to sell it at some level of discount. And there's a lot of factors that go into that level down. 

Richard Cunningham Chris, this is fascinating. So now you've got me captivated by what are some of these underlying assets or positions that are selling. Is it you know, we've heard a lot in the news about Venture capital's tough slog because valuations got so high in 2020 and 2021. So is it positions and interests and startup companies that are growing, or is it the buyout managers you guys were talking about earlier that, you know, buy control or the ownership entirely of a firm or a company? So I'm curious about what you're seeing on the market, if you will, for secondaries managers like yourself to go in and acquire. 

Chris Kim Yeah. Earlier I mentioned like the secondary market is really divided into three big buckets and the first bucket being LP interest and debt cost. It's around 50% of our activity. And now within that LP interest it's primarily buyout. Buyout is the heavy. It's always been the anchor of secondaries activity. Most funds generate quite well and they're easy to trade. And then if you look at say in the venture world, probably the second largest within the secondary universe, it's still the discounts are quite large on the venture side, and a lot of it has to do with usually, you know, most venture companies are on the younger side and not cash flow positive. A lot of times you're pricing basically off the latest funding round versus a lot of buyout companies. They do a full valuation analysis with the like. There's various ways to go about a comparables, DCF, things of that sort. But the venture assets a lot of times the companies like well the companies worth the 2021 series B that was raised in 2 or 3 years has elapsed. You know, not really much has happened to that company. You know, you even wonder, is the company even operational? You know, with all of these. 

Richard Cunningham It's a long time in the life of a company. 

Chris Kim Yeah. Especially when a company that's like only say like five years old. So the last two years, you know, you really want to know what's been occurring. But it's sometimes hard to get that information about the company unless you work there or something. And also, I think people are just worried that venture assets are very inflated the past 3 or 4 years, you know, their rates at astronomical valuations for multiple reasons. And with the high rates, it definitely doesn't help as much. I think venture capital assets, you know, companies are trying to grow at really fast clips. I think interest rate checks anymore. That's how I did a buyout in the venture. I think there's definitely quite a bit of activity with credit funds. Right. It's a pretty hot sector right now. Generally you know the risk perceive of credit funds slower. So a lot of secondary buyers like that kind of yield and they trade quite low real estate along with venture very difficult right now I think the spreads are to live. And when I talk about spread for both venture and real estate or just anything in secondaries, it's just what the sellers are willing to sell an asset for. What a buyer's willing to pay the gap is just still to versus buyers. It's not too difficult for a buyer still to come to an agreement, and there's still activity in the mentioned real estate, but it could be greater to spread narrow. But spreads are quite there. 

Andrew Behrman Yeah, I think I mean that's a key piece right. Like on the discount, Chris, as you come as a buyer to buy a fund interest, it's largely. Are they going to be related to? Well, what's the strategy of the underlying assets. Right. Like how early stage is this company, how reliable is the underlying value that all of these assets are being marked at? I would assume and then there's some function of beyond. I mean, you articulated all of that. Well, there are some certain types of companies where the valuation is probably a bit more reliable, like buyout for example. And then there's also a component of timing, right. Well, for example, if I want to sell my house and I can wait 36 months, I'll probably get a better price if I need to sell it tomorrow. Right. And so maybe just say a little bit about how does the speed of needing liquidity, because what comes to mind here is kind of the institutional versus retail seller. And I know you operate with both types of sellers. So maybe just say a little bit about, you know, how does that kind of speed of exit required relate to the discount that you might see? 

Chris Kim Yeah. Thank you for pointing that out, Andrew. It's definitely one of the biggest factors when it comes to pricing. Even within the secondaries world, there's different timelines that people work with. And my brain's all over the place. I'm like, well, where do I start? I would say starting with like large and small sellers, they're just different profiles, like most large sellers, like they're probably large pension groups. They are large endowments, foundations and universities. And a lot of times they don't make that decision on a whim. And they're going off, let's say, a $1 billion portfolio LP interest. You know, they probably planned it out many quarters in advance. And a lot of times they're not doing it because they lack liquidity. It's almost we call it a portfolio reallocation. They are just moving capital around. They have an X amount of dollars or percentage. Private markets know related some other portfolio or they want to deploy it somewhere else. Or they could be like a new CIO comes along for this university and they're like, I need some money. So I could implement this strategy within the portfolio, the overall portfolio of the endowment for small sellers. You a lot of times they're like high net worth. So are small family offices falling down. And then even liquid is, I would say, more than just a simple reshuffling of the capital. Maybe some of the sellers you dealt with were providing liquidity solution for them so they can meet their debt payment. Maybe the father passed away the family and the children. They want to figure out the capital that's locked in these private funds that the father invested in and used for something else. They buy a house. So I would say a lot more real, like more relatable situations for small sellers. And that's kind of like one of our main purposes to be that liquidity solution provider. And the timing does help with pricing because like stock market, the exchange rate, I don't know what the seconds it takes. It's probably like a millisecond to take a trade. And you go your broker, can you get it into cash flow shows up in your brokerage account, even though stock the fast as you could do a secondary trade for like a typical LP interest trade, it takes about a quarter, a full quarter as in like months. So it's not a fast process. And for a seller that really needs cash, the last thing you want is that trade to fall through. And then they got to restart the process and it takes them another three months. So I think something that we're really striving for our security to be very reliable. It's dependable. That's probably where a lot of folks on all sides want to work with sellers, want to work with us. Intermediaries want to work with us even though they're large secondary buyers. You know, we're hoping that they'll recommend us because, you know, we're dependable. We don't try to trade deals. You know, I always like, tell our group that our word is gold. So even before a contract is out, like if we say we're going to do it at this price or at this timing, you know, we're going to do our best to, you know, stick to it. So there's a little plug on us, I guess. 

Andrew Behrman Yeah. Well it's important, right. Because as the private markets grow, generally retail investors are going to increasingly enter. And that can be a good thing right to have exposure to that in your portfolio. But what I hear you saying a bit is, you know, all investors need to be considerate of what's my total asset allocation, what's my risk tolerance, what are my liquidity needs going to be. And generally, institutions are going to be in a situation where they have a longer time horizon. They can be a bit more patient. And so that's just a key consideration for, you know, retail and high net worth investors as this market continues to grow and become part of their asset allocation. 

Chris Kim Yeah. And one of the thing I would add is generally large institutions like I mean I know they might have their own version of it, but they don't really have like life events that smaller like high net worth come across and that can shake up the plan. But I would say institutions generally have like they have a big shake up. Something happens to them, something big event. Usually I would say they're they have such a long term plan that any kind of whether it out versus the smaller sellers. 

Richard Cunningham Or key articulation from a rapidly growing and honestly just exciting development in the private markets guys. So thank you. All right. Brace yourself. This is going to feel like a hard pivot. But I think it's key on a marks in the markets episode. Just to kind of make sure we're as faith driven investors orienting ourselves around everything we're seeing from a headline standpoint and all that's going on. And so the general question I want for you guys is. What is top of mind for you right now in your work? And as you're, you know, faithfully going about being an excellent investor in light of, hey, we've got an election in the next 60 to 90 days. There is talk of an imminent rate cut coming here in September, maybe 50 basis point, 75 basis points. Public markets have been on a historic run. Is there going to be a continuation of that soft landing, hard landing? Where are we going to end up the inflation situation with kind of the balancing act of the fed in their rate cuts. You know, as you do your work and as I'm in a faith driven investor, you're listening to this podcast, what are those things kind of top of mind. How can we, as you know, the people of the cross kind of keep that redemptive mindset in the midst of all of these ever changing and ever active headlines? And so I'll kind of give you that grab bag to both of you and let you comment where you wish. And then we'll close with our final question that we love to ask after that, Chris, go ahead. 

Chris Kim Oh, that was a lot I want to try and digest right now. I think the Lord's just been constantly reminding me with, I don't want to necessarily call it noise, but everything is happening out in the world. Never forget to steward what he's given me. Well, like as in like, I don't consider myself the likeliest of like, leaders. But I think given this opportunity, this group, you know, I got two little kids now and yeah, I was even having a dinner with someone last night, and we're just talking about what it takes to just become wise. It just seems such a lost thing. My wife always says, and I say, she's the wise one in our family. I gotta learn from her. You know, the world doesn't need more smart people. She always reminds me of that. And yeah, it just comes with, like, just understanding how little we really know and how little we actually have in our control. I think ultimately just an added bit more on him. But sometimes it gets lost like it gets up in there, like you listed all these factors that go going and it just conflict is raising my work here and now I'm trying to build a team and think about how to build a culture and everything. But yeah, sometimes my mind just gets to ahead of everything too fast and I just go slow down just for life. And I forget the really important stuff. I would say not to try and see the things you do are important. I don't even know if that really just any things you just brought up, but that's something that's been really like on my heart lately. 

Andrew Behrman Yeah, I think it's an important consideration, Chris, of like, just like we were talking about investment horizons of different institutions. I mean, as private capital investors, we're fortunate and blessed to have the benefit of thinking through the cycle as it relates to investments right over multi year periods. So our capital is able to be a bit more patient than you may see at times in the public markets where things are driven by a quarter to quarter performance, we have a little bit more ability to say no. We want to have an active influence for the long term. And I think as believers, you know, we have we have the ultimate eternal mindset, right? Like we know where the end is headed. Right? And so we can be really grateful and rest assured in that making our plans right as we should, and diversifying, having a strong asset allocation but relying on, you know, it's the Lord's timing, it's his will be done. And we know what the salvation story is and what the redemption of creation is in. 

Richard Cunningham Looks like man, that's good from both you guys. I mean, I think the general answer I got there was, Richard, tune out the noise. There's a lot of headlines and it's just not worth getting lost in them. 

Andrew Behrman Look, there's going to be changing dynamics, right? I mean a lowering interest rate environment. Maybe some M&A activity does pick up. You start to see some of those distributions, Chris, that haven't been as present in the markets. 

Chris Kim I would just add like to address some of the actual topics. I just start with the rates and everything. Like at least amongst the secondary investors, there is a strong opinion that we do believe M&A activity will open up starting in the second half, if not first half of next year, with the expectation of rates absent of any major macro geopolitical event. That goes on and it's reflecting the secondary price. Secondly, pricing has been increasing overall and deployments been also increasing too. So when you have positive things going on, generally, it does indicate that there is an anticipation and expectation that net asset value should in the coming quarter. In the coming years, distributions are going to pre. So this slow historic ten plus percent. There's an institution debt that's going to rise as well. And so with those things secondary investors are trying to load up on assets. As they're acquiring assets they're only yielding 10 to 15% you know in distribution. So we've been seeing a lot on our side. And one thing that's kind of nice about us, and I think Andrew's probably in the same situation. Like we are essentially a funnel. You know, we actually have hundreds of positions. So we feel a notice if we actually talk to the GP's, we talk to all of these private firms and hear what they're seeing in the market, and they're getting a lot more activity with their portfolio companies, but they're perceived to be performing a little better. Do you say they're actually getting more inbound interest, maybe to be acquired or do some kind of strategic X, Y, and Z with it? So definitely activity is picking up in some sectors more so than others, I would say, by having good run things. Ventures, though, seems to be lining a little bit, but it's like picking up two and depends where you operate that you're right. It's been, I think, very strong play, especially with the hiring. So people look elsewhere for access to capital. 

Andrew Behrman Yeah, I think there's comfort in diversification I think and that's probably true for any investor to say like, let me build an asset allocation that's going to be in many ways all weather, so that when tough times do come in the short term, I'm prepared and can keep that long term mindset in mind. I mean, I think as a fund investor on the private equity side, I think we constantly are thinking about, hey, what's our top down view of secular trends that are going to continue to occur throughout the cycle? Right. And then secondly, how do we pick great managers with expertise that can navigate those cycles? Well, and I think if you're able to do those two things, you know, in a diversified way, you should be able to perform well. 

Richard Cunningham Two words, gentlemen, great summaries. And this is the question we love to ask at the close of every FDI podcast is, what's the Lord been teaching you in and through His Word lately? Andrew, we'll start with you. Chris. We'll close with you. 

Andrew Behrman Yeah, well, it seems like it's been a theme here, but, probably just the theme of patience and having a long term mindset. You know, I've got a 16 month old now. I continue to build the team here at sovereigns. And, you know, I've been reading about the patriarchs and the Old Testament, you know, and often when the patriarchs made decisions without seeking the Lord's guidance first or in haste, things didn't turn out so well. And so, I'm generally reminded, you know, to have patience, to be thinking with a long term view in mind. And it's easy, I think, to get kind of gung ho about how to steward capital. Well, right now, and I'm reminded that, you know, that's a multi-year exercise. And I'm also called the steward in my family, my community, and be an active believer in, active in my calling. 

Richard Cunningham You know, one of the things we love to talk about in the faith driven landscape and that is faithfulness over willfulness. I really appreciate that, Chris. What about yourself? 

Chris Kim Yeah, I think kind I touch upon that earlier about just wisdom. I think just as a father of two kids now and trying to lead this group too many times, I still find myself not boasting in the Lord, and he keeps bringing me back to first Corinthians that the only thing that's worth trusting is in the Lord. So I think that's been heavy on my heart and keep me grounded. If I lose sight of that, that it's actually like, I know the podcast variety, the backgrounds, you know, where we're at. But, you know, I'm in New York City and if there's anything that need some humbling, it's probably the city, you know? So I think it's very easy to get caught up with all the activity that's happening around you. And it's just wonderful to have to work to just constantly remind what it all comes out to. But I'm called to do so. Try not to take any credit. I got a question. That's awesome. 

Richard Cunningham Well, Chris Kim, our strategic partners, Andrew Berman, Sovereign Capital, what a joy to have you guys on friends. This has been another edition of marks on the markets with Faith Driven Investor. We will catch you next time. Thanks so much for tuning in. 

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