Talking Markets Podcast (Secondaries market) with Nate Walton, Ares Management

Hi, everyone. Dan Cassidy here. Welcome back to the Talking Markets podcast series here on the UBS Market Moves podcast channel.

For today, we will be focusing in on the landscape for private equity, including an assessment of the secondaries market, a look at trends, supply-demand dynamics, and even misconceptions. So looking forward to having this conversation with Nate Walton joining us right here at our 1285 podcast studio in New York. Nate is a partner and head of private equity secondaries at Aries Management.

Nate, your first time joining us here on Talking Markets. So great to have you at the table. And thank you for making the trip over to the studio.

Thank you very much for inviting me and look forward to the podcast. Absolutely. So we have a lot we want to cover with our audience.

It may be helpful at the start. Nate, if you don't mind providing a bit of a private equity backdrop to our listening audience. So how would you describe the current state of private equity, mindful as well of factors such as slower exits and longer holding periods?

What have you been picking up on? Yeah, sure. Well, I've been in the private equity industry for the better part of 20 years now, so the majority of my career.

I spent 15 years as a direct practitioner of private equity, effectively looking to buy companies, make them better, sell them, what a lot of my competitors did over the years. What I have been focused on in the last five years is our secondary business, which I find to be in a really fascinating place. And when you think about the backdrop of private equity, we ultimately compare and contrast what's happening in secondaries versus what is happening in the direct PE market.

But the direct PE market is going through a real structural change, I should say. Some people might say challenge, but it certainly is a change and probably has some challenges to it because for the better part of 20, maybe even 30 years, private equity benefited from a very accommodative macro backdrop. Other than pockets like the financial crisis, COVID had some challenges, but generally you had two decades of uninterrupted economic growth behind you and also accommodative monetary policy.

When you have a lever capital structure like you do in private equity, that accommodative monetary policy was occurring a lot of gains to private equity as an asset class. And so when you look at the median returns of private equity over the last 20 years, generally in the 13%, 14% net return range, so outpacing the S&P 500 for the majority of that time period, really a great place to put capital. And so when you think about PE as an industry, post the interest rates starting to go up in 2022, you started to see a change because that backdrop of accommodative monetary policy was no longer there to help support the industry.

So now we're in an era where assets are harder to sell, as you mentioned. Multiples have been coming down instead of going up on exits. So the year over year NAB growth of the industry has slowed and the distributions back to the investor base has slowed.

So all of that has created a structural challenge for private equity. Now, private equity will still do well, we think going forward, but it'll not be as uniformly well. So what I mean by that is the dispersion of outcomes and the dispersion of performance across managers will be wider probably than it's been in the previous two decades.

And so you really have to focus on private equity managers who have unique attributes of value creation, sourcing advantages, and really can make companies grow at a substantially rate faster than the market because the market is likely to be lower than it was in the previous two decades. Now, with respect to the secondaries market, what kind of growth have you seen there over the past few years? You used the word structural when referencing growth a few moments ago.

Would that be fair to say with respect to the secondaries market? Yeah, the secondary market is actually going through almost the inverse of what's happening in the direct private equity market. So if you look at private equity deal flow or transaction volumes, it went down from 21 to 22 by roughly 60 to 70%.

It has been slowly recovering, but it is still not back to the 2021 highs of private equity volumes. Meanwhile, secondaries has doubled in the last five years. So in that same time period, when you just think about the growth rates of the underlying deal volumes, one is growing at a 15 to 20% compounded annual growth rate and one has declined.

Why? Because they are effectively serving different purposes. So let's start with the traditional secondary transaction, which was a limited partner is looking for liquidity in an illiquid asset class and they have to sell into that market.

Last year, 2025, total secondary volume was about $225 billion. Roughly 125 billion or so of that was in the LP led market where an LP is looking for liquidity. Going back to 2015, that was 30 billion.

So you've had a 4X growth. Now, is that because there's a higher turnover rate or is it because there's a higher installed NAB of private equity? Interesting, it's the latter.

So many people believe it's because more LPs are selling than ever. It's actually not true. It's been about a 2% turnover rate for the last 30 years on the LP portfolio.

So it spikes occasionally during periods of extreme volatility, the financial crisis being one of them, but generally about 2% of the LP market turns over. So why has that market been growing at 15%? Well, private equity NAVs grew at about 15% as private equity got bigger and bigger as an asset class.

We now sit with over $4 trillion of NAV in private equity today. So the installed base got bigger and therefore the percentage of turnover is leading to LP growth. At the same time, if that was happening, which is just a kind of consistent growth, you had the advent of the GP led market and the continuation fund business, which I'm sure we're going to get into a lot more details.

But that market grew from $10 billion in 2015 to $100 billion in 2025. So a 10X growth in a decade. It's roughly half of the secondary market today.

This is where a GP wants to buy one of their better companies out of their own funds and recapitalize it with secondary. So you have, that's basically two macro trends that have been uninterrupted in their growth, despite the slowdown in the overall private equity volume in the direct business. So just running with this a bit further, as you mentioned, GP led transactions and continuation vehicles have become more common at a high level.

Nate, why has that part of the market grown? It's pretty simple. Yeah.

I've been doing private equity for about 20 years and people who go back at our firm who've been doing private equity for 30 or 40 years have always faced the same problem, which is you have to sell your best companies to return capital to your investors in the fund and effectively lock in an IRR. But what that meant was you were always selling your best companies first. You know, you get into three, your three or four of the fund, you'd have made three or four times your money.

The way you had a good fund was by selling those early winners early in the fund life. There was no reason the company wanted to be sold or needed to be sold. It was a great company.

So there was just no way for the private equity firms to kind of keep control of those companies. And it was about 2015, 2016 when the market said, well, what if we brought secondary investors in and offered a liquidity solution to the existing investors in the fund to buy it out? And GPs around the world, you know, their ears perked up and they said, wait, I get to keep control of my best companies and provide liquidity to my existing investors.

This might be the greatest thing that's ever come into private equity from their perspective. Now, the secondary market has to ultimately be the evaluator of all these transactions. But the GP's desire to do continuation funds is almost unlimited.

Now, when you think about that $4 trillion of NAV in the private equity markets today, you know, we estimate that in 2025, about 15% of all PE deals were continuation funds. So, you know, call it one out of seven or so. And when you think about that in context, if you apply 15% of all the existing NAV in the market, that $4 trillion, you have $600 billion of GP led capital of opportunity that's going to come into the market in the next five plus years.

So we're going to average in our view, 100 to $150 billion of GP led potentially over the next five years. And the secondary market has been rapidly trying to raise capital to keep up with this, but it's really structurally changed private equity. Well, interesting to hear about the market evolution.

Just to single out the software sector for a few moments, can you speak a bit to how private equity in general is thinking about exposure to the software sector? The volatility around software is a further reinforcement for those who needed it of the benefits of diversification. So secondary managers do not overweight any one sector or any one manager.

So we are effectively looking across the private equity market and we have a certain exposure to any sector, but we're not making sector bets. So when there are corrections in the markets, our impact to our own portfolios is a lot less than anyone who was say 30, 40% software or 100% focused software firm. So it's going to cause disruption, but again, the secondary market will kind of glide through it.

What will be interesting to see, there's kind of two questions I get asked a lot, which is, you know, are people selling software funds and at what price? And the answer is not yet, but the price is unknown. And so those two variables and factors will change over the next three to six months.

People will start to sell software funds and we will find price discovery. My guess is the sellers of those funds are not going to like the prices. If I look at a couple of years ago when VC funds were selling, when nobody kind of knew what was going to happen in those markets, the discounts were quite wide.

The other thing that's interesting though, is the GP led market is very underweight software. Software was not a big focus for GP leds in the last four or five years. Why?

Because GP leds generally buy on pretty conservative multiples for, you know, steady businesses. And so the multiples that software wanted to get done at, you know, low to mid twenties, when those deals would come to the secondary market, the secondary market largely said no because we could buy really good high quality businesses at 15 times. So we as an industry, I think our underweight software and GP leds, we're probably neutral weight as it relates to the LP portfolios, because those are broad representatives of the private equity market.

And I think ultimately private equity, I was talking to some folks here yesterday in town, some P managers, and they're as busy as ever except for software, right? So software will slow down. Transaction volume will slow as people try to sort through this.

But what we're hearing really across the board and the other sectors is a lot of activity. Now, as far as supply demand dynamics within the secondaries market, what have you been picking up on there? What perhaps is driving supply and any supply demand imbalance in secondaries to note?

Yeah, supply, supply, as we just talked about, it has been growing rapidly, right? So we've basically doubled in the last five years in terms of deal volume to about 220 billion. You know, we're up probably, you know, three or four X in the last decade in terms of deal volume.

So has capital formation kept up? And I, it's, we talked to a lot of people and they said, well, I read about this big fund that got raised, it was $20 billion. And then there's all these different products out there.

Isn't there too much money chasing secondaries? And the math is, does not support that conclusion. So the math is pretty simple.

We think there's about $400 billion of dry powder in secondaries today, 225 billion in transaction volume last year. So under two times available capital to transaction volume is a pretty tight market. It means you would theoretically run out of all the capital in the secondary market in a two year period at that, at that cage without, without raising new capital.

Now, what's really interesting to us is if you extrapolate those same structural trends of GP led growth and LP led growth on the same trend line, they've been on for basically the last decade, you're going to be at somewhere between 400 and $500 billion of volume and secondaries by 2030 or so to keep a one and a half to two times capital overhang or available capital, you would need to be at roughly 600 to maybe even 800, even a trillion dollars of available capital. I don't see it. I don't see where we're going to raise that much money as an industry.

Um, because today we're at 400 billion and we've raised a lot to say we're going to double all the capital that's in secondaries today in the next three to five years. Aggressive. There's not that many managers.

You know, one of the misconceptions people have is they, they read the headlines about the big funds. Well, when you compare it to private equity, there's 1500 private equity funds out there, you know, probably a thousand of which have over a billion dollars in secondaries. There's like 10 to 15 large players, maybe 30 meet, you know, in total when you include the midsize players, the depth of the secondary market in terms of managers is a fraction of the private equity market in terms of the number of managers.

So when you add all those up, you just don't have the same depth of capital, which we like because it means we are in a structurally undercapitalized market that has been structurally undercapitalized under undercapitalized for a decade. The PE managers who are trying to get into secondaries, you know, we're raising new funds, predominantly focused on gp led because they see the same thing that we see are still raising relatively small amounts of capital. So even if you add up 10 new entrants who all raised $2 billion, you're talking about $20 billion in a market that last year alone grew over $40 billion or $50 billion.

So you know, we're not, we're growing at a faster rate than we are raising new capital. Now, with respect to return drivers, a lot of focus on buying at a discount to nav, how much of returns and secondaries actually comes from pricing versus asset selection and underwriting. So it depends on the type of deal you're talking about.

And I think that the misconception because many of our, you know, investors in the world have over the years been conditioned to hear secondaries equates to LPs and trades and effectively leads to discount capture. That is probably half of the return generation on an LP transaction. So there's kind of three ways you make money on an LP transaction.

One is discount capture. One is go forward nav growth of the portfolio and three is the distribution of that capital back to you. So those three variables effectively generate your LP portfolio return.

It's been about 50 50 between the nav growth and the discount capture over a long period of time. We expect that to, to largely remain true, which is a nice place to be able to park relatively safe capital, uh, on a consistent basis because some of your return comes from discount capture. The GP led market is skews probably more towards, you know, 80, 90% towards nav growth and maybe only 10 to 20% from discount capture.

And the reason is, is because these are the best companies in their funds. GPs couldn't sell their best companies attended. You know, they couldn't sell them at big discounts or they're buying them on the other side of that transaction is they're both the seller and the buyer.

And so their own LPs will not allow them to sell those at big discounts. So what that means is the companies that the secondary market is willing to finance and the GP led market are those that have the highest nav growth. And so on average, we see nav growth in the 15 to 20% range across the GP led market.

And we've seen that now for about a decade. And it means you can actually have a secondary thesis that is complimentary in the form of both nav growth from GP leds and discount capture from LP leds. And we think that's kind of the way to balance an optimal portfolio of secondary.

And then attributes of an attractive GP led deal, anything to highlight there? So we look at a few things. The first thing we look at Aries is how well do we know this company, this industry or the sponsor?

So, you know, private markets don't have the same level information playing field as public markets, right? There's not, you know, quarterly filings of public, private companies. So you have to understand the private market companies, one of the largest providers of private credit in the world.

So we, we look at thousands of companies, we understand companies and industries and sponsors. And we've actually had a relatively long history looking at all those businesses. So we try to figure out which are good companies in attractive industries with good sponsors.

We then look for alignment of interest. We're generally looking for that general partner to roll 100% of their GP commit from their prior fund, 100% of their carried interest that they're going to generate from this fund or from the transaction and write a due check. And the new check can come from the partners of the firm individually, or it can come from their new fund that they're investing out of or both.

And those, those generally all have to be true. So we can find a good company generally that's growing at 15 to 20%. We're buying them on average at 14, 15 times EBITDA.

Interestingly, they're not as levered as the private equity industry because there's not a new auction to kind of find the clearing price. They're just transferred over with whatever their kind of current capital structure is. So on average, their leverage is about five times versus, you know, a traditional button bought buyout might happen at six or seven times.

So less levered companies growing mid to high teens, very strong alignment of interest. Generally, they've been the top performing investment in their current fund or certainly top two or three. So, you know, validation that these are star assets that are being dropped in the secondary market.

What's really interesting is if you think about that trend over a decade, you know, if every year this happens, you know, 15% of the private equity market, you're going to wake up in a not too distant future and find a lot of really good companies sitting in the secondary market that used to be in the private equity market. With respect to manager selection, just putting yourself in the shoes of a financial advisor, knowing that it's a very crowded market out there. How do some of the top secondary managers in the space differ from a strategy perspective from one another?

And are they all largely executing on a similar playbook? I'd say they're executing on a similar playbook in that they're generally buying LP led or GP led transactions, right? You'll hear that from different secondary players.

Independent secondary managers are going to struggle in our view as GP leds come into the market because they don't have the depth of knowledge about those companies. Now, when you buy an LP portfolio, by definition, no one company is generally bigger than 0.5%, for example. So you can buy based on diversification and beta.

So the traditional players who focus on the LP side of the market have been trying to figure out how to get into the GP side of the market. So you have to ask yourself, what are they really good at? If they're really good at making returns on LP portfolios, that doesn't necessarily mean they're going to be really good at doing GP leds.

And now you've seen private equity firms come into the GP led market and say, you know, we think we can be really good at this because we're private equity firms who know how to pick companies. And that may be true, but they also may not have some of the same kind of portfolio management skills that some of the legacy secondary funds have. So, you know, ultimately your strategy has to align with your competitive advantage.

And so if you can kind of understand what somebody's competitive advantage is, and then are they executing their strategy in conjunction with that? We believe at Aries, our competitive advantage is the fact that we cover over a thousand general partners in our business with 500 investment professionals. And we have thousands of companies in our portfolios across our firm.

We will skew more towards the GP side of the market. We also think that's where the long-term growth is, but we will compliment that with the LP kind of portfolio construction that allows us to maintain diversification. So again, you've got to focus on what you're good at.

And I think whenever you're meeting with a secondary manager, you know, they can tell you about those same market trends that I can tell you about, but really push them on where are you getting your competitive advantage. So as more capital has entered the space, it's highly competitive. Where do you still see inefficiencies or even areas of opportunity today?

I would tell you, you know, people ask me this question, is secondary is a trade? Is it, is it a moment in time? And let me just kind of separate the markets because they actually do operate somewhat independently.

The LP market is a cost of capital that the secondary market charges to an existing investor in a fund who wants to access liquidity. It has functioned that way for 35 years. And so what is that cost of capital?

It's somewhere in the mid-teens, meaning the secondary buyer will expect a mid-teens return for buying out an existing investor out of the fund. Now, what changes is at different parts in a market cycle, how much of that return generation is going to come from NAV growth and how much is going to come from discount capture. So in a period like right now, where the NAV growth and the P markets relatively modest on a historical basis, there's a bigger discount capture.

So secondary funds, by definition, should always do a mid-teens return because if the NAV growth isn't there, let's just buy at a bigger discount. If the NAV growth is there, they'll buy a smaller, smaller, it's a cost of capital. And that's why it's not a moment in time.

Now, there are moments in time where that cost of capital actually goes even higher. You know, you get into a financial crisis, a COVID situation. Now, maybe with the secondary market starts charging 20% cost of capital to get, you know, people liquidity in that, in that environment.

You know, software probably is an example. Somebody trying to sell a software fund right now probably isn't going to, isn't going to get priced at a mid-teens return. It might get priced at a 20, 25% rate of return to compensate for that volatility.

Now that, that market is going to continue to be there very long because it's the only way to provide liquidity to an otherwise illiquid asset class. That's why it's a great business. Now, GP leds actually offer you something kind of different.

They allow you to charge a private equity cost of capital, meaning a 20% cost of capital, right? Which is the expected costs of a gross private equity deal on an underwritten basis. So if some private equity firm wants to do a continuation fund and convince the secondary market, this is the one they should back.

Well, the secondary market looks around and says, you know, if I'm going to take an asset bet on one company, I want to make 20%. So that's effectively the cost of capital that we charge the GPs. So the GPs are getting charged and effectively on a look through basis, their LPs and everyone are getting charged a 20% cost of capital to access our market through continuation funds and are getting charged a mid-teens or cost of capital to access our market on the LP side.

And that's, that's kind of where it's been. And I don't think that's going to change. I think that's a pretty attractive setup.

Now, in terms of any misconceptions, as we begin to close out with respect to the secondaries market, anything that jumps out to you that you would like to make our listeners aware of? I wouldn't call it a misconception. I just think that maybe misunderstanding is how quickly this market has changed.

You know, if I look back eight, nine, 10 years ago, secondaries was 90% LP led, 10% GP led. If I look back five years ago, it was 65% LP, 35% GP. The first quarter we just finished here in 2026 was actually the inverse was 55% GP, 45% LP.

What does that tell us? That tells us that secondaries is not simply to provide liquidity for LPs. It is a, it is a liquidity solution for the private markets.

And now that the GPs who control $4 trillion of assets, they are the manager of $4 trillion of assets, see this as an opportunity to raise more capital, keep control of their best company. That trend is, you know, effectively a runaway trend and it's not going to stop. So I don't know long-term if secondaries is going to be 50, 50, it may even be 60, 70% GP led, you know, three, four years from now.

I don't quite know. Nobody quite knows that today. It'll be a bit of a function of returns and available capital for the market, but it's not your secondary fund of 10 years ago where the only thing you kind of had to know was what the discount is and where discounts are.

The market has evolved very, very rapidly, which we think actually quite exciting because it gives the opportunity for a little bit more customization and some higher returns. Well, Nate, you've been very generous with your time, a very educational segment, a lot of value add here for our listener base. So thank you very much for dropping by in person.

Great to have you at the studio and do hope to have you back at some point, Nate. Thank you for having me and thank you to UBS. This podcast is presented for informational purposes only and should not be relied upon as investment advice or the basis for making any investment decisions.

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