Kasper
Alex is CIO and founding partner of Nodem Capital, a provider of portfolio backed liquidity solutions across private markets. Previously, Alex was with Sturgeon Capital and Cambridge Associates, advising and managing capital for institutions, family offices, and global investors across private equity and venture capital. Welcome to Balentic Edge, Alex.

Alex
Thanks, Kasper. Thanks for having me.

Kasper
Alex, you’ve sat on the allocator side at Cambridge, the GP side at Sturgeon, and now at the liquidity provider side, if you like, at Nodem. Which experiences most shaped how you think about risk and liquidity today?

Alex
Good question. So at Cambridge Associates, essentially we would help clients who had portfolios of fund positions make, you know, sensible decisions about their long-term asset allocation. So adjusting for valuations, for example. But in terms of liquidity, we’d run the spending models, deployment models, go through various different scenarios about what could happen. And I think the lesson there was more liquidity risk isn’t about the quality of your assets as much as really having realistic expectations, judging that asset liability mismatch on the sturgeon side, i.e., when I was a GP on the private equity side, really what you’re learning is how expectations of LP and GP liquidity can differ. So for example, a GP holding a position for seven years because they low they know and love the asset and really want to maximize an optimal exit may look like failure for a an LP that’s expecting a five year holding period. And really I guess Nodem and what we’re trying to do here is really offer kind of strategic kind of bridging facilities where there are mismatches for whatever reason it might be. But yeah, th those are some of the lessons.

Kasper
Fan fantastic. And just on Nodem, for listeners who may not be that familiar with you, where do you sit in the private markets ecosystem and what problems do you solve and you just alluded to it for LPs, GPs and asset owners in general?

Alex
Yeah, so Nodem is a NAV lender and that means we provide loans against diversified portfolios of private assets. So we’re not pushing any debt down to the underlying businesses. So maybe taking a step back again, what does that mean? So private equity fund raises equity capital and it will use leverage on a deal by deal basis to buy those companies. That debt shifts to the company. the equity in those companies, so sort of the value less the debt. That combined is your fund NAV. That fund NAV effectively is collateral that could be used for another loan on top of that. And it is used by private equity funds predominantly where they have somewhat levered portfolio in order rather than raise more equity capital from their LPs, they can get, you know, cheaper capital, i.e. a NAV loan against that NAV, the fund NAV, in order mostly to do bolt-on. bolt-on kind of acquisitions. in theory, they could use also to fund distributions. It could use it to fund all sorts of things, accelerate management fees. But the most common one is to accelerate fund management. And so the market’s around 100 billion in volume. You get very, very you get banks that do some of the larger transactions, lower LTVs. You get the likes of 17 Capital who will do 200 million dollar facilities to a very large private equity buyout and Nodem sits there kind of really servicing mid to small private equity funds and family offices, those that are holding diversified pools of illiquid, illiquid assets that are kind of underserved by the broader market, you know, th wherever there’s a liquidity mismatch. So you’ve got a you’re a family office with a maturing portfolio waiting for DPI. You want to keep your vintage year diversification, keep investing. You might want to lever your older LP stakes ahead of you know, DPI that’s expected in the next couple of years to keep to keep investing, or you may be able to take advantage of an opportunity to buy a distressed secondary, whatever it might be. You need capital right now. You don’t want to sell that into very kind of opaque and difficult secondary markets. And sometimes it’s easier just to borrow in a modest way against that. So that’s how I’d characterize it.

Kasper
So I think I think you’re providing a a good service here to a number of different counterparties, the family office institutions. But if we zoom in on the GPs for just a second, how concerned should I be on the back of an era where GPs by and large have been paying up on pro forma EBITDAs that stretched way into the future using one offs, which arguably under accounting rules probably shouldn’t have been done? How concerned should we be as LPs applying leverage at the NAV level? Now you’ll probably be fine. You got an LTV and presumably the underlying assets are healthy, you would you would do the due diligence. But as an LP, should I be running for the gates when they start doing this? also because they’re ostensibly juicing up the returns, right?

Alex
Mm-hmm. Yeah. I think there are good reasons and bad reasons to do it. Like a bad reason would be that you’ve already kind of levered up the portfolio to a maximum level. The companies are incredibly weak. And in order to bail out the underlying companies that are kind of heavily levered and maybe kind of facing kind of declining kind of revenue, this is seen as like one last kind of Hail Mary in order to raise capital at the fund level to push down to fund those businesses. I don’t see any NAV lenders funding anything even close to a transaction like that. I mean, as a NAV lender, you would come in, you would look for, yeah, modest amounts of leverage at the underlying level, and you would look for a kind of a strong use case. So the answer to answer your question, sometimes you should absolutely be highly concerned and scrutinize what the GP and why they’re doing it. But in some instances, if they’ve got a strong portfolio, you know, they’re 100% drawn you’re in year six. And there’s there turns out that one of the other shareholders in your best anchor company, for some reason needs capital quickly and you have the ability to buy shares at a discounted rate, and that ends up being the most that you could get capital from a NAV lender at, you know, three hundred and fifty basis points above a rate at a ten percent LTV, and you can buy this thing that is at a steep discount and can add real value. That makes that makes sense. But Where there’s a weak portfolio and this is being used to either cover up the cracks or to accelerate money out of a portfolio that’s worth significantly less. But that’s really an underwriting skill. But I mean the ILPA guidelines on NAV lending are relatively clear now. Really, it should always be taken the use case to the LPAC in order to scrutinize the use case for this. Why is it being used? And then often, you know, y there would be a broader consent required as well. Particularly many of the older funds don’t have in their documents the ability to use facilities like this. So some amendment needs to be made. That said, more and more it’s becoming common in there. So there are very much good and bad use cases for this.

Kasper
So may maybe a little bit stretching the concept here, but would it be correct then to say that if you’re uncomfortable with a NAV loan at the portfolio level, you should probably be uncomfortable with the GP and the portfolio in the first place and may not want to be there to start with.

Alex
I think, I mean, the more concerning thing, right, is anything that really encumbers your underlying companies. That’s how you destroy value. So if you’ve over levered the underlying companies, that’s destroying value. Whereas, you know, modest NAV loan at the portfolio company against a modestly levered portfolio doesn’t really add any kind of cascading risk. It’s it’s actually you should be more concerned about the companies underlying it being wiped out by the lending there. And even then it’s you know, it’s part and parcel of the strategy. So you again you really have to scrutinize it.

Kasper
Okay.

Alex
Everything can be done well or badly.

Kasper
Yeah, the the opacity of course for LPs also arise because we tend to be at arm’s length and we tend not to have the toolbox to sort of, you know, work our way through these things and fully understand them and we cannot do it at the speed that’s often required, to to have a meaningful say on do we like it or not.

Alex
Mm. Yeah. Yeah. and I’d say NAV loans are one seen as one of the more kind of have been seen as one of the more controversial kind of things that an LP can comment on, the same way capital call lines were, originally the same way that certain of the LBO structures were as well. There seems to be kind of an adoption curve here. And we’re still in we’re certainly still in a phase where it’s growing rapidly and people are the frameworks are now coming up to to match it. But I can totally see without that transparency, how it’s hard to make a decision on it and why it could be perceived as scary.

Kasper
Moving a little back to risk, I think private markets as a whole spend a decade assuming that your liquidity would eventually arrive. you know, hope hope is eternal. has the industry, do you think, been underpricing liquidity risk all along? Because it is an illiquid asset class where we’ve bent ourselves out of shape to try to create what the cynic and me would describe as synthetic DPI, synthetic liquidity.

Alex
Yeah. Yeah. I think it’s kind of important to be precise about what was maybe underpriced. I think the assets themselves weren’t the problem weren’t the problem. It’s more maybe the industry underpriced that cost of cost of time. And of course it really goes back to the, you know, when interest rates are at zero, the illiquid positions help us have no opportunity cost in that sense. You can wait indefinitely and most of the capital was raised during that. that era where if you’re at a five percent risk-free rate, then you know, every dollar that’s l not being distributed, it’s not earning something elsewhere, and that repricing is enormous and still happening. and I think it’s you know private markets require that patience by design. yeah, and I think liquidity tools like ours are emerging now in response to it, but that’s how I’d probably characterize it.

Kasper
So following on from that a little bit, again, y you put your LP head on here from your from your Cambridge days. What should an LP be doing now? What should they be looking at in their portfolio? What what’s the first thing they should take away from this and go home and do, if you like?

Alex
I think it’s we alluded to it earlier, but it’s kind of things can be done well or badly. Like some GPs perform well, some don’t perform well. I think understanding why they’re doing what they’re doing is the underlying genuinely a very strong company that they’re trying to maximize value, or are is that, you know, that GP particularly bad at producing DPI? Producing DPI is a very different skill to investing capital and often a more difficult one. It’s deploying the capital is only one part of the one part of the picture. And I think what proactively you can do is I think that, you know, to certain degree, you have to punish poor performance in your in your GPs. But to do that, you really need to look through your portfolio and understand, kind of as I’m sure you do, w what is happening and make a judgment call on that. I think if you are in need of like bad, you know, really badly in need of liquidity or there is some pressures there, I think a NAV loan should be considered in the sense that, you know, at a very modest level you can there is value in your older holdings that can smooth that cash flow for you. You can, if you need liquidity, can also approach secondary markets where liquidity is really concentrated in a real handful of private equity funds, private equity backed names, even worse in the venture side where 85% of the liquidity is in twenty names, I understand. And so I think one really scrutinize your GPs, why are they doing what they’re doing? I think if you need liquidity, do consider a NAV loan alongside secondaries, like really look at all your options when it comes to that. Another one would be a continuation vehicle. Again, why are you doing that? Is there no market for that? Or are you trying to kind of, you know, get management fees for a longer period of time? Or is it a very, very valuable exit route? And the specifics matter in all of these things. and so it’s always scrutinized. Don’t, don’t take things blindly, like really do. Interact with the GP.

Kasper
Yeah, so we paraphrasing you a little bit, we’re back at LPs who pay GPs in principle for three things, buy something, hopefully at a good price, do something with it, hopefully something that improves value, and sell it. And LPs should now be triaging their portfolios for the GPs that are doing that and look to, you know, get rid of somehow the ones that are not doing that. Is that fair?

Alex
Yeah, a hundred percent. Yeah, absolutely. Couldn’t d couldn’t have said it better myself.

Kasper
Moving on a little bit, we’re gonna we’re gonna jump a little bit more into the private market liquidity conundrum here. There’s a lot of discussion today going around about gating, delayed exits, continuation vehicles or CVs, NAV lending, and what some people are calling the the SaaS-pocalypse or venture reckoning. from your seat, what’s beneath the actual headlines? What’s what’s going on? Can you can you give us a fly in on that one, Alex?

Alex
Yeah. so yeah, the market is clearly genuinely, genuinely slow. So holding periods are, you know, seven years up from whatever five over the kind of the teens, in terms of the twenty tens or twenty nineteen. there’s a huge number of backlog. I it’s a lot of this is driven by the interest rates we mentioned below and now the unwinding of that trade. You’ve got secondary markets that probably represent around one percent annually of Outstanding unrealized value. So you have, I feel like the market has been focused very much on primary capital, deploying capital into kind of low interest rate environments. And the market is now responding by raising more capital, dedicated secondary vehicles. There are innovations around, I’m sure we’ll get into it, evergreen vehicles to kind of inject more capital in some instances into the market to buy those assets. So the market is trying to rationalize itself to a certain degree. on the SAS SaaS-pocalypse, I think that what people often conflate there, whilst there are some concerns, I think the headlines tend to be more about the asset liability mismatch of the fund structures, i.e., BDCs that have wealth capital in that are kind of you know shooting to the door whenever there is a headline about the SaaS-pocalypse, whether or not it’s real or not kind of matters less. It’s more there’s a run on the bank effectively in these structures. And they’re now being gated. So I see less systemic risk right now, though you have to keep an eye on it. I see it more, more concern about the liquidity mismatch of these kind of evergreen type vehicles. So in short, there has been a huge run up in primary fundraising for and deployment on the private equity and the venture capital side. It’s taking way longer to exit those investments. There’s a huge backlog that will take, you know, even if you are average exit volumes eight plus years to clear out. So you know this is taking a lot longer than everyone thought. and you should adjust all of your assumptions and model as an LP to take into consideration huge slippages in the durations you expected go going in. But I don’t see myself from where I’m sitting, I see pretty conservative. I mean w I sit in an asset class that’s only like 0.3 kind of correlated to direct lending in that sense. So it is quite it is quite different. But I do see I see all of the portfolios like an LP. I’m underwriting every asset class you can possibly imagine as an LP in this, but kind of underwriting, you know, is that NAV real? What’s in that as in a view to kind of lending. And I and I need, you know, liquidity within five years for my strategy to work. So I have to be very conservative. But I th there are some areas that are to be concerned, but I think broader systemic risk less so I see. yeah.

Kasper
Excellent. I wanna go a little bit deeper on NAV lending or NAV financing. I it’s new, right? So I think some people immediately interpret it as a sign of distress. How do you as an LP or yourself, how do you distinguish between sort of productive liquidity management, which you’re saying is one use, and then where there is genuine portfolio stretch, and you allude a little bit to it on the underlying companies, but again as LPs, that’s often not a luxury we have to be able to drill that Deep down nor do we have the time or necessarily the toolbox.

Alex
Yeah. Yeah. F yeah, from an LP perspective without access to data, it’s gonna be tough. I can only really speak about it from my perspective. So let’s say productive liquidity management, really the what that looks like as an investor is trying to access capital against what is pretty clearly a performing portfolio with a pretty clear plan as to how that gets paid. Often there’s an M&A process in action, there’s kind of an IPO being filed, there’s like real tangible not just a tenuous, you know, promise to sell a minority stake in a company that you know will be a nightmare to get to get hold of. There is some kind of monetization event on the horizon. It’s not just a blank, we hope something will happen in five years. I think it’s really important. I think the comfort with NAV lending really comes with some visibility about when it can be repaid. and you know that’s something we require as well. So if that’s not there, it’s a time to be worried. I think genuine stress again is often relatively easy to identify. It’s pretty obvious that they’ve there’s no other option. So they’ve gone and tried to sell things in the secondary market or they’re overvaluing things or whatever it might be and they’ve they’ve basically failed. the distributions have dried up and a NAV loan is seen as a kind of a way to distribute something to investors, maybe in a portfolio that’s worth significantly less. I mean, to be clear, like, you know only about ten percent of NAV facilities are ever used for distributions. and of those it’s it often doesn’t look like that. I see pretty NAV lenders tend to be pretty conservative and they’re really trying to smell something like that. But as I said before, there’s an LP, if you’re on an LPAC, you should really be scrutinizing why is this being used. And in some instances, you know, the question is look, this is ultimately pretty cheap capital. that we can use for kind of a creative purposes. And you know, we’ve got multiple ways out of this trade. Like we could you know, sometimes it’s there’s even some undrawn LP capital that can be used to repay it or at least partially. There’s certainly like one or two liquidity events that are coming. In some cases there’s dividend, whatever it might be. But it’s i in the interest of all parties for this to have pretty clear payoff. It’s just there’s just that payoff is not right now. It’s in two years. that’s that’s where the value comes.

Kasper
Yeah. Go going back a little bit to one of our earlier points as well, there’s a lot of the private market portfolios that we’re looking at today and that I’m sure for you is eligible for NAV lending. They were built in an era where, as we talked about, you know, capital was abundant, interest rates were practically zero or zero, and liquidity assumptions were generous in terms of look, you know, everything gets refinanced every third year, distributions come fast and frequently. What then breaks down in portfolio construction when this when the debt, so to speak, stops being effectively free?

Alex
Yeah. good question. I think the I mean what’s clearly happening is the J curve extends massively, i.e. that period of time the for the kind of the value and the distributions really to come. So yeah, capital is cheap, deploying quickly, markups early, higher interest rate environment, it clearly it slows down not only Not only is the I also the amount of leverage you can use. So it’s not only the interest rates, you know, up or down, it’s actually the amount of equity that you need to put in is far higher now as well for a similar reason. you have again the opportunity cost of that illiquidity just becomes more visible as well. And I think that you there are alternatives you have to kind of the duration that you have to wait now for that capital to come in. I think on you have to adjust your returns to control for that as well and that opportunity cost. What are the illiquid equivalents of direct lending or, you know, private equity in some instances of public equity as a as a as a I think a lot of people have forgotten that there are public markets out there as well that can offer a valuable counterweight on a portfolio construction basis. And maybe the ultimate conclusion ends up being, you know what, we might need to kind of slow down our deployment or actually undersize maybe private equity versus what it was. And there are some periods where lower interest rates are there, it’s a better environment, and there’s some that aren’t. that’s a very kind of nondescript kind of answer to that. I think you’re saying what is the w ultimately what is the effect for portfolio construction? maybe those are the conclusions, yeah. I think cutting down, modelling modeling far longer distribution cycles. yeah.

Kasper
Yeah, so it filters into for LPs things such as cash management, which arguably the institutions should have a better grasp of versus your private individuals. So now we get into and we’re not going to dive into that rabbit hole, Alex, but now we get into things GP should be considering, which is counterparty risk. No distributions coming. Can people actually meet their capital obligations? staying on this one a little bit.

Alex
Yeah. Yeah.

Kasper
Have we then at this point in the cycle, if we can call it a cycle, maybe it’s just a new normal, maybe we’re overshooting a little bit and there’s a mean reversion to what it used to look like, I think back when you and I started, which is a decade, maybe two decades ago. But have we reached a point where some of the vintages need to be re-underwritten, so to speak, using you know, different assumptions?

Alex
I find this is something that comes up a lot and obviously it’s critical to what we do because the V in the LTV is the NAV, effectively obviously. And so I’m I am literally my job is to re-underwrite, you know, re-underwrite fund NAVs basically is w is my day to day. I am, I’d say, pleasantly surprised by the better, you know, the higher quality GPs I really do feel are marking portfolios. fairly whilst there’s huge amount of discretion on the GP side, for sure, in terms of the way that these things are marked, I find that the best GPs are being pretty proactive in terms of marking portfolios accurately and really articulating what is what is happening. I think that’s another signal for you as an LP, right? If people are not marking things down often, you can compare between funds, the same company being held, if it’s being marked in a different way, I mean that is a sign of a weaker a weaker GP. So I like to think if you have a strong portfolio of GPs, actually it should be of l you should always, you know, double check it and check, ask what the comps are, ask what the inputs that went into the audit, the or the management accounts that came up with that statement. But ultimately I think there’s less concern if you’re in higher tier GPs. I think if you’re in less well known GPs, weaker GPs, maybe sometimes emerging managers that might not have that same discipline in it. I think you sometimes you do have to take things into your own hand hands. Like if you have a fintech portfolio that, you know, is being held at twenty-one marks or whatever it might be. I think you might need to look at what the comparables are in the public markets and apply your own haircut to it just for your own sanity. But I would say that’s a sign of a weaker GP and probably one you might not want to re-up into. There should be, you know, erring on the side of caution, I I find, but I’ve been pleasantly surprised. I thought it would be worse than it has been going into kind of into Nodem a couple of years ago we really started digging into this. Having been aGP before, I’ve now seen a much broader range of funds. And yeah, it’s not quite the disaster that people make it out to be.

Kasper
So as we all now head home after listening to the podcast, you know, to triage our portfolios, that’s actually a bit of good news. That that the best GPs out there are doing what they’re meant to be doing and we can kind of rely on that. The bad news to take away from this is that there really is a lot of work ahead for the LPs in terms of figuring out what’s what in their portfolios, and then we have to ask ourselves the questions. Do we have that toolbox as LPs or should we speaking with, you know, professional advisors to help us on that? moving on a little bit, Alex. many investors view credit as a safer part of private markets, a little bit like the public markets. I I grew up in leverage finance and was like always heard the assumption, you know, from big investors. but that’s easy, it always comes home. today the cracks are starting to appear.

Alex
Uh-huh.

Kasper
You know, it might actually be the very mechanism through which the stress is being transmitted into the portfolios. I in that context, how do you think about the relationship between liquidity leverage and credit y risk today?

Alex
Yeah, I think look today, I think the thing that people misunderstand a little bit about it is I alluded to it earlier, the mismatch between the liquidity promises of fund managers really and the actual liquidity of the assets they hold. So direct lending, I mean, it’s gone from a hundred billion or so to two trillion plus in over the decade. to raise capital at that pace, they’ve had to go now to wealth channels, ultra high net worth individual high net worth individuals. Offering kind of innovative structures like quarterly redemption periods and things like that introduce almost a kind of bank style asset liability mismatches. And actually, if you look through these portfolios, the default rates, yes, they differ. I still not, for me anyway, at a level that caused like major concern. Some of the biggest blow-ups have actually been banks themselves doing it directly. And so I see a lot of the concern right now is really if you look through it, it’s around that asset liability mismatch as opposed to the underwriting. What I would say is that if there are broader, major, major fundamental problems with direct lending, I mean, that’s private equity problem as well, because there’ll be there’ll be as you know, seen it with a few kind of big, big kind of blow ups recently. You know, the lender is the last person you know can well can at least get the salvage value of it, but the equity gets wiped out as well. So this is all intertwined for the various reasons we mentioned. I personally don’t see any like massive kind of systemic risk at the moment. I see that there is some competitive laxity on the direct lending side as it became more and more competitive. And in some cases you would have to win a deal by having looser covenants or whatever else. But more broadly speaking, I think there’s certainly some concern. I don’t see any systemic risk. And I’d say if there is systemic risk we’ve all got bigger problems, I think

Kasper
A again another piece of good news to take away from this. along this line, what are the sophisticated investors getting right or wrong about private credit at this stage of the cycle? And here I’m also thinking that we certainly have a financial focused newspaper your way that seems to be on a almost holy crusade against anything related to private debt.

Alex
Yeah. I think I think as with everything, it’s lumping kind of all the GPs as kind of equivalent quality and doing things. There are, you know, there are bad banks, good banks, bad lenders, good lenders. I think really differentiating there is important as opposed to a blanket, this is bad, this is good. I think there’s also a tendency to conflate f like first lien direct lending to a single software company to I don’t know, even someone like a Nodem that’s investing a fifteen percent LTV against a company with eighty companies in it, with a hefty equity cushion in it, or whether it’s NAV lending, NAV lending is another one that’s had a lot of bad press. But if you look through it, actually they’re saying that it’s manufacturing kind of DPI, that’s a very minority kind of use case. it’s not encou again, there’s an implication it’s somehow encumbering the underlying portfolio companies. It doesn’t. So you really again If there’s a theme, it’s like do your own work to really understand some of this as well. And again, like on the private credit side, really the issue is more the structures that have been invented now to suck more capital into the asset class that is causing the issue as opposed to the underlying right now. so I there’s always like a grain of truth in everything there, but you know, it’s it’s certainly again, again, I would say it’s not it’s not the disaster that everyone kind of says it is.

Kasper
A g another well, s certain newspapers and other people, other good people. Alex, what happens next? If distributions do remain muted and exits do say slower than expected, what kind of second order effects for LPs and for GPs, what’s gonna happen over the next three to five years in in your opinion?

Alex
By everyone I mean, yeah, certain newspapers. I mean DPI is consistently held up as the primary factor in when to kind of re-up into a new manager. And I think you’ll just see managers that are unwilling to unable to manufacture, not manufacture, create DPI for their investors. The investors will just vote with their feet. And so you’ll have a concentration you’re seeing this already, a concentration of investment going to fewer firms that have proved themselves actually able to create. DPI, which is you that’s part of the product, is that you get your money back at some point as well. You haven’t delivered. And so the second order effect will be I think you’ll see a large number of managers probably, you know, fail in that and and slowly kind of wind their portfolios down. You’ll see capital accrue to those that have achieved that. And I and I think you may in many cases there are investors that really invested very, very heavily into the asset class over the twenty twenty twenty-one period that will likely slow their pace of commitments or dial down their private market exposure slightly in the knowledge now that they need to, you know, be baking in fifteen year cycles into venture capital or eight year cycles into to private equity. I think you it all goes back to the Cambridge Associates, your modeling your portfolio as to what can happen, your stress testing those situations. The assumptions are just now entirely different. So if you bake that in there, I think the model will split out what I just mentioned in terms of the actions.

Kasper
Yeah, but so and we’re also to some extent back at I think the toolbox that you and I grew up with, me in a previous life, you at Cambridge, were we we invest consistently over the long term through cycles, knowing full well that some vintages will outperform, other vintages will underperform, and there will be prolonged stretches of illiquidity. I think we both sat through the the GFC and some of the aftermath of that we had a currency crisis and so on.

Alex
Yeah. Absolutely. and of course, if you are cash rich now, you can take advantage of some of these dislocations. You know, there are people that need liquidity. You can buy those assets. You can yeah, you can you can you you can you there are opportunities for cash rich investors right now to there’s certain venture assets that are pricing easily fifty percent discounts. There are some private equity that are pricing down as well. So, you know, being proactive. these things that it can be negative to others can also be positive for others as well.

Kasper
Alex, we’ve talked quite a bit about the risks. I think that’s also where the concerns are for a lot of LPs in terms of trying to understand this. but let’s let’s put the positive cap on here. what excites you about this opportunity right now, maybe also because the broader market is actually quite worried, not just, you know, newspapers and so on and other pundits, but LPs, GPs, etc.

Alex
Yeah, so yeah, good question. I think yeah, so the the so taking private credit again as an example. So the narrative, as you mentioned, is negative. I mean the r the result of that from my perspective, for example, for my investors is that we’re seeing wider spreads, lower LTVs, high quality portfolios in many ways because you have people like banks that are retrenching from the space the way they did before. So sometimes What is perceived as negative can be good for someone that’s like, you know, allocating into a strategy like ourselves. And I’d say, again, going back to it, what excited you, if you’re sitting now on liquidity or have access to liquidity sometimes even through a NAV loan, and you know where to how to originate kind of either underappreciated or those that are in need of kind of liquidity, you have an opportunity to have a real structural advantage right now in this in this market. And I think that is pretty exciting. you still need to be extremely choosy about what you do within that. But that represents a huge a huge opportunity right now. And you can see that in the reflection of the kind of growing secondaries market, which is fragmented, but yeah, represents huge opportunity.

Kasper
Yeah, so so we’re back at what you just said before. This is actually a good time if you’re a ca cash rich buyer sitting at that intersection of the market, which to some extent Nodem actually then does. you can afford to be picky, you have the right toolbox, you understand the underlying assets, and you can price them and possibly do quite well from that.

Alex
Exactly. Exactly.

Kasper
Alex, we’re we’re almost at the end of it. we’ve time for a couple of quick fire questions. We’d like to end with that. also makes for some really good snippets later on in the social media. What risk are people talking too much about in private markets today, in your opinion, which is not really relevant?

Alex
I think the valuations I find the best GPs again being proactive in that, I think fairly, fairly marking their portfolios.

Kasper
And then what is the risk that almost nobody’s discussing today? That they should be discussing?

Alex
I think the asset liability mismatches should be discussed more in these new innovative kind of democratizing vehicles. I think that there that there’s a place for them and they are being discussed, but I think being conflated with things that are less of a risk, like the underlying underwriting, for example. so yeah.

Kasper
But I think that’s a that’s an excellent point. five years from now on, or five years from now, sorry, you put your long term cap on here and that’s also about the d duration of of what you do. What do you think investors will look back on and realize they misunderstood? That’s not a quick fire, maybe.

Alex
I think they misunderstood the value of pop I think but I think the the undervalued the benefits of public markets, I think to a certain degree, and that they actually can be quite and you know, there is a reason that the tr the transparency, the efficiency of the price discovery, capital allocation, there is there is a genuine value to it. I mean, there are a lot of companies that have chosen not to take that on and you know, there is a risk that breeds things that would have either been kind of come to come to the light far quicker in public markets. So maybe I mean, yeah, maybe that’s I would go down that route probably. I think I love private markets, but I think maybe public markets have been dismissed too easily.

Kasper
So you heard it here in Balentic Edge, a private markets podcast, we should be looking more at public markets. That’s a that’s that’s an excellent takeaway, Alex. Yeah. No may maybe just on a serious note, just applying a little bit more scrutiny, but often that’s at the level above the investment teams, obviously in many ways. know, how do you set your overall asset allocation and portfolio construction?

Alex
Yeah. Or at least yeah, love loving it a bit more. Yeah.

Kasper
Alex, look, this has been an absolutely fascinating journey down NAV lending. We talked about things such as the critical risk is about realistic expectations and differs from GP to LP. We talked about NAV lending can serve multiple purposes and parties, their pros and cons. The importance of the LPAC actually understanding this, We are also early on, and I think that’s really important to note, in an adoption curve. So everybody is still learning. There’s a lot of education to be done. Maybe not be fearful, but just at least be conscious of what’s what’s actually what in in this. you know, also I like that the th that GPs have to produce DPI, which is very different from investing. And I think that is actually something that has been happily forgotten over the last cycle, at least, maybe a decade and a half. So less systemic risk I liked as well, but liquidity risk. Liquidity risk obviously is much easier to manage than if it’s systemic risk. So that’s a positive to take away. important also for LPs to think about the J curve actually extending. What does that mean for how they think about portfolio construction and cash management? NAV lending as a re-underwriting tool, something that I think we should probably all be doing, whether or not we then provide a NAV loan or not. I think re-underwriting the GPs we’ve invested in, the GPs re-underwriting the assets is particularly important. Another piece of positive news I took away from you, the best GPs are marking their portfolios correctly.

Alex
Mm-hmm.

Kasper
While some still don’t have the discipline and those are the ones you want to start looking out for, is it maybe a reason to cycle out of them? and then I w one final takeaway, and I think it’s really positive for those who are cash rich, hey, this is a good time to be cash rich. There will be some nice pickings out there if you have the toolbox and if you have the understanding of the asset classes. Alex, absolutely fascinating. Thank you for being on Balentic Edge today and sharing your insights with us.

Alex
Cool. Thank you, Kasper. Thanks again.

Kasper
And thank you also to our listeners for tuning in to this episode of Balentic Edge. We will be back soon with another episode.