ep143 patrick stroth mike bego

Secure Smarter Insurance for Smoother Transactions

98% of the time, we fail to understand the intricacies of secondary market transactions…

How does rep and warranty insurance play a crucial role in closing these deals?

In this episode, Mike Bego, managing partner of Kline Hill Partners, reveals the secrets of the secondary private equity market and the role of rep and warranty insurance.

In this episode, you’ll discover…

  • The advantages of rep and warranty insurance that help close transactions smoothly.
  • The types of clients Kline Hill Partners focuses on in the secondary market.
  • How Kline Hill Partners facilitates liquidity in private equity transactions.
  • Why the secondary market is expected to see significant growth in 2024 and 2025.
  • Key details about Kline Hill’s annual secondary day event and how you can participate.

Mentioned in this episode:

Transcript

Patrick Stroth: Hello there. I’m Patrick Stroth, trusted authority in executive and transactional liability and founder of Rubicon M&A Insurance Services, now a proud member of the Liberty Company Insurance Broker Network. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions, and we’re all about one thing here. That’s a clean exit for owners, founders, and their investors.

Today, I’m joined by Mike Bego, managing partner of Kline Hill Partners. Founded in 2015, Kline Hill Partners is an investment firm focused on the private equity secondary market with industry-leading capabilities in the small deal space. Secondary transactions have been increasing significantly of late. So I’m thrilled to have the authority in secondary space here to share his perspectives. Mike, thanks for being here. Welcome to the show.

Mike Bego: Patrick, thank you so much for having me. I’m honored to be here.

Patrick: Well, great. Well I mean, just with this trend coming up, it’s great to have a trendsetter among us here today. So before we get into secondaries, and Kline Hill Partners, let’s talk about you. What got you to this point in your career?

Mike: So, Patrick, I’m happy to walk through the background. But a couple of insights before I give you the story of what got me to where I am today. First side comment that after already having been in my career for about a dozen years, in 2005, I was looking to get back into the private equity investing industry, which I had previously been a little bit.

I was calling around, I spoke with a recruiter in the early part of my search process. And the recruiter said, Mike, you’ve never been an investment banker. You’re not currently at a private equity fund, you will never get a job in private equity. Bang. Trying to save me a bunch of time on my search.

And so now almost 20 years into private equity secondaries, you know, I’m glad I sort of stuck with it. And I’d encourage everybody, whatever it is you’re working on, it’s important to be thinking about being in the department of Yes. Yes, we’re gonna get this done, we have someplace we’re going to get things accomplished.

So I think that’s an important part of the backdrop for a high-growth industry, like private equity secondaries. And so I’ll walk through my background a little bit, I’ll go through a little detail. And part of the reason I think it’s relevant is it actually in the summer of 2015, when I was sitting in my basement just by myself, working on the strategy and the early couple of people, after finding an early couple of people to help me get everything going with Kline Hill and then build the firm as a team together.

I came across a statistic, which is what is the average age, that’s most successful for people who are entrepreneurs launching new businesses. It turned out, it was surprisingly 47 years old. When you think of entrepreneurship, you often think of like the 20-year-olds, and Silicon Valley and all that. It’s 47 years old.

So I’m gonna go through a little extra detail, because in hindsight, and knowing that having this rich background of things you’ve done can actually be helpful. So with that note, I graduated from operations research from Cornell in 1993. And that major was focused on solving prompt bullet problems computationally. So it’s a very good background for problem solving and using technology.

Then I spent the 1990s, working for a supply chain software company called Newmetrix, which is now part of Oracle. Initially, I was running projects to implement that company software. I got more involved in the sales and sales is a great part of anyone’s background. Because not only do you have to learn how to tell a story, and communicate and convince people of things, but you also learn a lot about what people are looking for.

So anyways, that was the 1990s. I then went to Columbia Business School, I put in a lot of effort in my studies. I was actually there often late on Saturday nights studying, actually, and really got a ton out of it. And I have a shout out to Gailen Hite, who is my first semester, my finance professor who really taught me a ton of just how to take income statements and balance sheets and tie them into thinking about them in the context of companies and how they operate.

So that was a great experience for me, sort of learning the entry parts of the finance world. Then I spent three years doing software venture capital. My first time on the job investing and actually helping run companies. And this was during a time when the venture industry was falling apart. Because it was when if you remember when the Punchbowl was taken away, capital dried up for the industry, and it was a very tough time for the industry but it was a great learning experience.

Because I got to see on the ground how these businesses, some managed to survive, and some needed to be taken into bankruptcy. But it was just a great process for me and my career. Then I ran operations for a turnaround which is a long story, great story for a separate conversation. Then I spent two years at McKinsey and Company, which is almost like getting a second MBA.

It was a fantastic experience, I have a lot of appreciation and respect for that firm. And so in 2005, after ignoring the advice of the recruiter who suggested I don’t bother working on private equity, I was fortunate to get into the secondary industry. And I was fortunate because, Patrick, I got a job opportunity at a firm that is very small. Small and growing.

But the good thing about that was, you really get exposed to, or you can get exposed to all different aspects of the business at a small firm, and especially, like Kline Hill Partners, a very entrepreneurial firm. And so I think that gives you just a lot better bedrock and foundation for understanding the business much better than if you’re like a little cog in the wheel at some huge firm.

Even if it’s some world-beating famous brand name, it might not be the best, especially earlier in your career. So anyways, got into secondaries in 2005. At that point, the whole secondary industry was $5 billion. So we step forward in time, the secondary industry has been growing at 17% annually compounding. And so this year, we’re looking at about $150 billion secondary industry.

And in any case, I had spent just under a decade at this other firm. And in 2015, I left. I had nothing lined up, I didn’t have, I hadn’t been interviewing for jobs. I didn’t have investors beating down my door before I left. I was sitting in my basement. And it was very fortunate that a few investors who had known me very well over the years followed my track record, and really appreciated the strategy. Called up and suggested if I started a firm that they might be interested in investing. So the Kline Hill story really starts in 2015.

Patrick: And that’s before all this comes up now where a lot more people know about secondaries today than back in 2015. I think that it underlies what you bring to the table because you’ve got that engineering background, so you know how things come together and how they’re taken apart and how they work together.

You couple that with this financial training that you’ve got that was very intensive, then you get the global hands-on in a company where you had to do multiple tasks, not just be in one department, so you weren’t limited. So I mean, you really put in a real great, I would almost call it a from apprentice to journeyman to master. And that brings us to where we are today.

And you know, as we hear about secondaries, just for the benefit of our audience, if you can just share with us, let’s just get a little bit basic with this. But what are secondaries? They come in a couple of different flavors. And then we’ll talk about why now suddenly they are top of mind. So why don’t you give us a beginning with secondaries?

Mike: Absolutely. So I’ll start a little bit with private equity. And there are really two main camps there. There are buyout funds, which are, there’s like several 1000 of them around the world. And they’ll go out and they will purchase control interest in large companies that have may have dozens or hundreds of people, or 1000s of people.

And they’ll take their money from a broad range of investors, mostly institutional investors, insurance companies, pension funds, endowments, and foundations. And then there’s the venture capital industry, which will raise money from the same types of investors that these buyout funds raise money from, and then they’ll go provide capital to startups and other companies that hopefully, many of them will go grow, and become world-leading technology companies.

And so those are the two main types of funds in the private equity industry. Today, the total assets managed by those types of funds are $7 billion. Or sorry, $7 trillion. So $7 trillion in the broader private equity industry, including venture capital and buyout funds. And if you compare that to the public stock markets or the public public stocks, there’s a large multiple. So over $30 trillion of value in those companies.

Might be closer to 40, or a little bit more right now, actually. And those companies have very easy liquidity if you’re an investor. So if you own a public stock, you can very easily open your browser and at the touch of a key transact at a price that’s updated every second on the stock exchanges. Very simple.

For the private equity industry, however, there is no such mechanism to get liquidity. So you have these pools of limited partners, which are these pension funds, endowments, foundations, all these groups that provide the capital. And they provide the capital and in any one fund, their capital is tied up for many years.

They have to wait as those funds invest in companies, which then need to grow, and potentially 10, 15 years, sometimes even later, than from when the original investment is made, the investors have to wait for those companies to get sold or to IPO before they get their cash back.

So your money is really tied up for a long period of time. And so the secondary industry comes along to the situation. We raise capital, again from similar institutional investors, like those that have invested into venture and buyout. But what we’ll do is we will provide liquidity in primarily two different ways.

So one way is on the LP, or limited partner side, where we’re buying investments in funds directly from the limited partners, the pension funds, endowments, insurance companies, etc. So that’s the limited partner side. The second approach is around GP-led transactions. And for GP-led transactions, we’ll work individually one at a time with private equity funds. And about two-thirds of the time, we’ll buy a single company from a private equity portfolio.

We will provide all of the investors in one of those funds, the proceeds from that company, and any investors who don’t want the liquidity, they can roll and they can go join us in the ownership of that company. But for most investors, they can then take liquidity for that company, which will continue to be managed by the private equity fund that had already been overseeing it.

So the whole private equity industry today, again, we’re talking $7 trillion. This year, we’re projecting maybe $150 billion of volume in the secondary industry. And so if you think about it, it’s really just over 2% annually of the total volume that’s transacting. So in relationship to public stocks, which have around 100% turnover annually, there’s tremendous room of growth for the secondary industry.

Patrick: Okay, so, just simplistically, for me, the way I look at this is, you have investors that are in a long-term investment, and life comes up, and they may have to get out of that investment. Or the economy happens, and maybe it’s not a good time for the fund to sell one of its assets.

One of the portfolio companies or they just want to keep it running beyond an originally stated lifespan. They’ll say, well, we’re going to run this fund for eight years, and you get to year eight, and the market is not that good for selling those companies. So maybe we have to continue this on. And so it’s going to stretch out.

Something could happen and some of the limited partners may need to get out now for any number of reasons. And so where can they go, and they’re coming to the secondaries market. And then on the flip side, you’ve got general partners in the private equity that have the, the fund has run its course.

There are a couple of remaining companies that they’ve invested in. We would call them trophy assets, where they’re really good companies, doing well. But maybe they want 500 million for a particular company, and the markets just not going to give it to him. Well, they want to keep it running.

And in some cases, I think there’s maybe openness out there, where some funds may say we want to maybe hold on to this asset indefinitely. Because if it’s spilling out, cash is doing a lot, we can use it elsewhere. Why don’t we try that? So they would set up I think what’s called a continuation vehicle.

So we’ve got people coming and going in there, and you’re providing a marketplace to facilitate those. So people are even though they’re contractually locked in, you’ve got an out. And I think this is just the innovation in the markets right now, which is fantastic. And there are all kinds of benefits for this and it gives freedom to investors.

And it relieves a lot of pressure out there in the marketplace, particularly because these days and you can speak about this. There aren’t very many exit paths out there for investors, because you know the market is just not that great. So, if you can share with me what is it that is happening that secondaries are happening or increasing in activity now of all times?

Mike: So what’s interesting about the private equity industry, Patrick is, it goes in different cycles of how much natural liquidity as companies are sold. So in a mature private equity portfolio, you can often expect between five and 10% of the value of what you’re holding to come out per quarter.

So you do get natural liquidity from a diversified pool of assets. However, right now, which is similar to 2009 is that amount of liquidity is closer to 2%. So you’re getting much less liquidity than you’re used to. And if you’re one of these massive allocators, in many cases, you’re managing 10s of billions of dollars in pools of these private assets.

You have very advanced cash planning, where you’re expecting to get these cash flows in. You have sometimes uses for those cash and parts of your organization. You also continually want to be making investments in the new private equity funds coming out, because these are long-term relationships.

And so you may have a lot of different reasons why you just may want some extra cash out, especially if it’s not coming out naturally. Like today, it’s a little bit slower. And so it’s very natural and common for these LPs to want to do some portfolio management and get some dollars out, reallocate between different categories.

So that’s very normal. And same thing for the continuation fund. So if you’re a private equity fund manager, and you’re only giving 2%, back today, you’re used to giving five to 10% back, you can increase the amount of capital you’re giving to your LPs by forming these continuation vehicles, working with a secondary fund to pull the company out.

And so if you look at the industry, it’s about 60% of the industry is transacting on these limited partnership transactions. 40% is on the general partner side. And in terms of the way these transactions look is on the LP side, most of the transactions are between $100 million and a billion dollars.

So these are big-boy transactions with very large sellers, and huge secondary funds, often with 10 or $20 billion of capital. And that’s a bit where Kline Hill Partners fits in Patrick, because there are an awful lot of institutional sellers, who just have smaller pools of assets in the same funds. So if you have less than 50, or even especially below $20 million in a pool of assets, you want liquidity on the LP side, that’s a bit where Kline Hill fits in.

And on the continuation vehicle side, those deals are a bit bigger, they tend to be over $500 million. And then very similarly, Kline Hill provides a lot of value in the transactions that are between $100 million and $300 million, where the big players don’t really, they can’t come down and play because they have too much capital for that.

Patrick: Okay, and then with this process, talk about the role that Kline Hill Partners plays because you are coming into a segment of the market that has a lot of need. They are not the largest transactions, so they’re not getting the attention of some others in the marketplace. And you’re facilitating it. Talk about the process and what Kline Hill Partners brings to the table. You’ve been doing this longer than anybody else that I’m aware of. So experience is definitely that box is checked. But let’s talk about the other issues with the process.

Mike: Yeah, so look, there’s really a couple of things. So first of all, a big thing that Kline Hill does is we focus on an underserved part of the market. So you may have very large pools of capital, but if you’re transacting in LP deals, say below $50 million, or GP-led deals below $300 million, it’s hard to find a buyer period, let alone one who’s focused on that part of the market.

So right off the bat, we have a very focused niche on where we go. The second thing is the Kline Hill team is the one you want to be working with. Because we’ve invested a ton on having a very large group, we’re going to be 60 people in a couple of months. And so it’s a very big group of people. And we’ve done about 600 transactions together already.

So it’s not just a group that’s large, we have a ton of experience pricing assets in all different industries. And Patrick, one of the things that can happen is if you have a team that doesn’t have the time to really dig in and look at companies and value them on a company-by-company basis, which is the majority of what our transaction team here does, is this valuation work.

So if someone doesn’t have the time, because they either have a lighter staff or the transaction is too small, what you often do is you just come up with a really low number that you know is 100% safe. You won’t lose money, and you will make good money, but it might be a lot lower and not necessarily a fair offer to the seller.

And it can either make it difficult to get a transaction done, or there’s just a very high friction cost for the seller to work with buyers that aren’t appropriately staffed with the right team. So we also have A we have the right team, and I’d also say on the continuation vehicle side, it’s also extremely important because we have a very long track record of getting these deals done.

So for the deals that we lead, we’ve closed 100% of them. Anytime we’ve led a deal they get done. And part of the reason is we bring in a very good size check ourselves to get the deals done. And we have very strong syndicates of investors that are strategic for the GPs that we can bring in, who not only provide the capital to close a deal but then they can move on to be long-term relationships of capital providers for the GPs.

Patrick: So you’re bringing in almost, you didn’t have the experience as a banker, but you’re almost as an investment banker, you’re you’re finding buyers to come in. You’re finding the new sources of capital for the liquidity. So I mean, you’re a one-stop shop. Is that fair to say?

Mike: Yeah, no, look, we’re a solution provider. So we’re in the department of Yes. So we are in the business of getting these deals done. We do bring a lot of potential capital sources with us. We’re also well-known in the industry, we love to work with partners. Happy to work with other secondary funds, happy to work with different allocators. But we’re yeah, we’re absolutely in the department of Yes, to get these deals done.

Patrick: That’s how you opened, so that’s fantastic. With some of the tasks that go along with this is there extreme heavy diligence as you do on a traditional M&A, a little higher level?

Mike: There’s a big range. So if you think about it, there’s a range on how concentrated the deals are that we work on. So in some cases, on the LP side, those are typically portfolios of LP funds. And we could have, we did a deal recently that had over 100 funds. And if you think of all of the underlying companies literally approaching like several 100.

And so we would do a lot of bottoms-up work on companies that drive a very large portion of that value. And so that is going through and studying the company’s financial statements speaking with the sponsors, we do a lot of expert network calls, and really getting the value for those companies.

But then there might be some that are smaller, where you do a higher level of diligence. And again, that’s where you might have, you can’t have that be too big of a pool, because then you take more conservative marks. So we work hard to really bottom up underwrite a lot of the assets. And then you can flip from those diversified LP deals. And when you look at the underwriting required on the continuation vehicle, GP-led side, we do trophy asset deals, where Kline Hill is often doing mostly single asset deals.

And there we will go incredibly deep, spending not just many weeks, but essentially a few months on a single company, speaking with management teams, customers, and competitors, and doing a lot of industry research and work. So you could put together volumes of data from what we’re sifting through to valuate those companies.

Patrick: And as you’re going through, I mean, particularly if you’ve got a dedicated team, vast experience, and you’ve got the manpower and enough players in there to go and review this stuff and do all that work. Is there a risk of things getting missed by other firms that don’t have the dedicated resources that you do?

Mike: Well, look. I think overall, the secondary industry does a great job. So if you look at the $150 billion getting done today, that’s built over, been built up over decades literally. And Patrick the average return on a net basis within the private equity industry to investors in every vintage since 1993, which is from some Cambridge Associates numbers, is all double-digit net IRRs.

I think there were four or five single-digit net IRRs, which is the average annual return if you invested in fund from that vintage, any vintage. So secondary funds have done great for investors. And look we’re buying very diversified across the secondary industry and we’re also buying into assets from these private equity pools that have a number of years behind them.

And so we’re buying assets where a lot of the losers may already be out a lot of the cash needs and problems on the tech side are often behind us. And we’re buying into just a much more stable pool of assets. And on the buyout side, the debt is often largely paid down quite a fair bit. So it’s a much less risky part of private equity.

Patrick: When you mentioned risk, I mean, one of the things that happened in mergers and acquisitions, where it accelerated was the insurance industry came in and provided a tool to allow the parties to transfer the indemnity risk between seller and buyer away to an insurance company. And by doing that, all of a sudden, buyers had assurance of recovery. And sellers could get a clean exit.

And it took a bit of time, I mean mergers and acquisitions have been around forever. The product that was used was reps and warranties. It took a bit of time, but since 2015, now in private equity, it’s ubiquitous. I’m just curious, good, bad, or indifferent with the secondaries. Okay. Because there it’s limited, but there is still risk. Have you had any thoughts on, or experiences with, rep and warranty insurance for secondaries transactions?

Mike: Absolutely. So, look, we have a ton of experience in the area. I know we’ve done this about 600 transactions. I’ve done a lot before that. I would say on all of the GP-led or substantially all of the GP-led continuation vehicles that we do, we do get this rep and warranty insurance. The cost on a deal, which could be 100 million to a few 100 million, would tend to be around $750,000.

And it may depend a fair bit on which options of that insurance you might select. But it’s expensive. It’s not cheap. But it does provide an important coverage where there could be potentially meaningful issues around the reps and warranties. On the limited partner side, that’s an area that we talk about heavily, we tend to use it less often.

But one area, one sub-segment where you may want to consider it more, Patrick, is we’re sometimes helping terminate vehicles that hold these fund interests. And the thing is, is once a vehicle is terminated, it eventually gets fully shut down. And there is nothing there to go after if there was some failure in the reps and warranties.

And just to be clear for the listeners, like what could go wrong in these reps and warranties? So there could be whether it’s on the continuation vehicle side or LP side, there could be some tax representations about how much taxes may be owed or not owed or paid or accumulated. There could be ownership reps that they own everything free and clear.

There could be cash flow reps. There could be all all different types of information that’s really important with regard to what you’re paying. And so I would say on the LP side, our lawyer who has done several 1000 transactions, they have never seen a claim on the rep and warranty insurance.

So the good news, Patrick, is this industry is one where the buyers, the sellers, the sponsors are very responsible. We have like by and large 99% of the industry are good fiduciaries, and people are honest. And it’s well run. And so there has never been from my from our lawyers’ standpoint, at least there has never been a case where it came in.

We examine every transaction. We do often buy it to be careful and good fiduciaries, and stewards of our investor’s capital and make sure that we get good returns. But fortunately, in the industry, there haven’t been many claims.

Patrick: With the presence of the rep and warranty, would that enable maybe the withhold of the escrow to be negotiated downward? So it’s less. Does it provide that kind of functionality?

Mike: That certainly could be a factor. So you could have smaller escrows, so cash could flow more freely. And also in the example that I gave, where you’re terminating a vehicle, sometimes those vehicles they want to wrap up, within days, or a few weeks of us buying their last assets.

If you didn’t have that type of insurance, you’d either have to leave a vehicle open for six months, a year, sometimes we’d look for 18 months of coverage on these reps and warranties. And they don’t want to do that and go through another K1 and provide more financial statements. So there are a lot of advantages with regards to cash escrows, closing vehicles, and just making the whole process run smoother, beyond simply getting the payout to be sure.

Patrick: So, Mike, I know you had talked about it a little bit earlier. But if you could provide us with a profile. Who is your ideal client? Who is Kline Hill Partners looking to serve?

Mike: So, Patrick, there are really two different categories that come to mind when you ask about who we’re looking to serve. So one is the investors who are looking to give us capital, to trust us with capital, that will invest in good secondary transactions and give them back great returns.

The second group that we’re looking to partner with are really sellers. And I see us providing a solution and service to both of those and the groups who are looking to sell assets or get liquidity, I would say that there are two groups. Again, we’ll look at it first on the LP side. So it could be any limited partner who holds these pools of private equity funds.

And so that again, it could be endowments, foundations, pension funds, banks, family offices, RIAs, all these groups that have private equity assets looking for liquidity. We tend to do a very high volume of transactions below $50 million. We do go up to 100, or a little over 100 million. But any group that would tend to have a smaller size pool of assets, and it could be a very large number of funds even.

And we’ll go down to deals even below $5 million. So final, again, we’re providing a service and solution to these sellers. And so, as part of our mandate and approach, we’ll even do very, very small deals. We also are a good counterparty for groups who have private equity funds that are very difficult to transfer.

So if you look at the overall private equity industry, there are several 1000 funds. I would say 95% of those funds are very friendly to transfers of their LP interests. They’ll help the buyer, they’ll help the seller, and they’ll make it an easy process. For a variety of different reasons, there are a few percent that are quite difficult to transfer, where they limit the buyers who can purchase the funds and they sometimes limit the information they’ll share.

And I would say that Kline Hill is one of the firms that has very, very good ability to transfer the fund interests that are often locked up, or tough to sell. So if you’re invested in groups, pools of those types of funds, we’re also a very good buyer. So that’s the sellers on the limited partner side. And then the sellers on the continuation vehicle side.

So there, we’re looking to work with sponsors. The deal sizes that we tend to work with most would really be one to 300 million, we’d look up to 500 million, but it would be people with pools in that range. We typically transact on a single company. So where you have one company. And the purchase price for that company would be around say even 50 million to a few 100 million dollars.

And we’ll look to work across industries. And for all of these cases, we’re very happy to have conversations with the sellers to explore if something makes sense or not. So people should be happy to call us up. We’re happy to provide our insights on what a value might be worth before we dig in. Always looking to make new relationships.

So we very much encourage people to approach us. They can easily do that at klinehill.com. They can come to our website. There are a lot of ways they can reach through and find people. And my email is mike.bego@klinehill.com. M i k e. b e g o @ k l i n e h i l l.com. And then if you go to our website, there’s general contact information as well. So I always encourage people to reach out.

And then Patrick, the second part of the answer to your question, in terms of who else can we serve in terms of clients is the group of limited partners that we owe a special thanks to who are our investors who are the limited partners who entrusted us with capital. And historically, about half of the investor support that we’ve gotten has been from endowments and foundations.

So a lot of very great charitable sources, who provide us capital. We also are working with pension funds, sovereign wealth funds, insurance companies, family offices, RIAs, like very broad group. And so I would say any group that has an interest, and that has a private equity asset allocation, especially ones that are interested in investing in secondaries, that Kline Hill is an excellent choice to look at.

And what we tend to provide them is to the extent they’re interested in secondaries, Kline Hill has a bit of a different investing niche than where most of the secondary funds are. So most secondary funds are focused on the bigger part of the market. And so as you’re looking to allocate dollars in the secondaries, you may want a secondary fund focused on the smaller end of the market so that you’re diversified across your allocation within secondaries. And so we would suggest Kline Hill as a great avenue to accomplish that.

Patrick: Outstanding. Now, Mike, as I ask all my guests, is what trends they see going forward. I mean, it’s obvious that secondaries transactions are trending up in both number and regularity. What do you see going forward in 2024 into 2025, for secondaries?

Mike: Well look, from a high level of secondaries are still just over 2% annual turnover of all private equity assets. So we strongly see a long-term continued growth in terms of that percent. And so it’s an industry that’s only going to grow. If you look at 2024, the year started with record capital at secondary funds, which, combined with a strong stock market, has really driven, strong amount of secondary transactions.

So it should prove to be a record year. I predict around $150 billion. This year, the LP transactions appear to be beating out in terms of total dollar volume, the GP-led side, but both are extremely strong. And then what will be interesting to watch is, as you look at 2025, the question I have is, are we going to see a solidifying economy where liquidity and return of capital to investors picks up and might it be a really strong great year for the industry?

In which case you’ll see it just be another growth year for secondaries. Or are we going to have economic instability, the recession everyone’s been predicting for a few years? Does it finally come? And if that happens, then you’ll have a bit of a cleaning out in the industry, typically, that would cause volume to drop. It’s when that happens, Kline Hill is one of the few firms that’s actually very busy in a market dislocation. But going into 2025, it’ll depend a lot on what happens with the economy.

Patrick: And we’ll see what happens. We’re a few months away. I think when we get the election passed us, I think, a lot more uncertainty goes away. Mike, there’s one other thing now is that Kline Hill, you have set up an annual secondary day where you have a meeting up in New York at a conference and you bring all the the best and the brightest in the secondary field together. Talk about that, because that’s coming up, and give us the whole rundown, please.

Mike: Thanks, Patrick. So the secondary days started out in 2006 as a friendly dinner among four different secondary funds. And it’s really grown over the years. So if you look at 2024, we’re going to have several 100 people attending from the industry, mostly secondary funds, also a number of advisors, and some limited partners all getting together.

I think it’s the largest get-together like this for secondary funds in the industry. And it has a few different components. It kicks off with a women in secondaries day. So we bring all the women in the industry get them together for an event in New York City. Then we have a panel that is moderated often by a reporter in which we’ll bring in the different advisors in the industry.

We talk about the latest trends of what’s going on in secondaries. And that’s open to a pretty broad group of people, Patrick. So if some of the listeners here are in this private equity industry, interested in secondaries, the panel is a fairly open forum. And then we have a charity lunch. And so in the last couple of years, we raised over $100,000 for the Melanoma Society, the Lymphoma Leukemia Society.

This year, we’re very happy to report that the Alzheimer’s Association is a group we’re looking to raise a lot of money for. It’s a great institution helping people with real problems. And so then there’s a dinner where we bring in a keynote speaker. We’ve had great speakers before, such as Hugh MacArthur who runs Bain’s Private Equity practice, Steve Klinsky with New Mountain, Andrea Auerbach who runs research at Cambridge Associates.

And the list goes on. Just phenomenal speakers that we bring in to give a keynote for the dinner. And then it is typically about 80 or 90 professionals from the secondary industry come for the dinner. And then it wraps up on Thursday out here in Greenwich, we get together, everyone together for some friendly golf and some friendly pickleball. So I would say, Patrick, we work in a very collegial industry.

I mentioned before about the rep insurance how there never has been a claim. The overall private equity industry, look, it’s a great industry for the country that creates literally millions of jobs and is just a great innovation engine that is a great part of American industry. And within it, the secondary industry helps support that, provides liquidity to the great investors who bring in capital. And the secondary day is a great event for us all to get together.

Patrick: That’s fantastic. What’s the name of it, and is there a website or anything up for it right now?

Mike: So, The Secondary Day.

Patrick: The Secondary Day, okay.

Mike: You’re not going to read about it in the Wall Street Journal ever probably. You’re not going to read about it in the big magazines. It is a little more of an industry insider event, but it is open arms and I would again say if anyone is interested they can email mike.bego@klinehill.com. Mikebego@klinehill.com. And I have people that will help me with email. I won’t have to read if a bunch of people reach out.

Patrick: Put it in the subject line, The Secondary Day. What time of year is it?

Mike: Patrick, The Secondary Day in 2024 will be on October 8th, 9th, and 10th in New York City and wrapping up in Greenwich.

Patrick: Fantastic. Mike Bego, Kline Hill Partners, thanks very much. And I appreciate you sharing your insights today.

Mike: Patrick, thank you so much for having me. It was really fun to talk about the secondary industry. Very nice to be on your podcast. I’m honored by you, including me. So thank you very much.

Patrick: Well, I’m looking forward to us talking again very, very soon. Thank you.

Mike: Thanks, Patrick.

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