How can LPs get liquidity without selling their stake?

welcome to episode 38 of fundraising demystified today we have Alex Simpson founder and CEO of open Stock A Private Stock liquidity lender for limited partners to access cash on their illiquid Investments if you manage a fund or invest in funds this episode is for you Alex is a repeat founder who discovered the need for LPS to have access to cash in a market where private companies stay private for longer he has an $800 million fund backing himself specifically to lend to LPS in private Equity private credit and real estate funds we talk about his experience catering to family offices and highth individuals allowing them to amplify their Investments through Arbitrage and other investment strategies Alex shares his advice to fund managers on how to manage LP expectations around liquidity and how open stock can be their partner to ease liquidity issues with their LPS Alex is a sharp and tactful leader who is careful with his words and knows his audience audence it was a pleasure having them on the show and as a reminder to get notified of our weekly podcast and newsletter be sure to subscribe at join. thunder. VC again that's join. thunder. VC now on to the show welcome back everyone welcome to fundraising demystify today we have Alex Simpson joining us founder and CEO of open Stock welcome to the show Alex thanks thanks Jason good to get good to be out man no I'm excited to have you share your story with the audience today we're mixing things up a little bit where we're talking not just about your history with open stock but also kind of the liquidity markets overall and kind of introducing our audience to this concept so I'm really excited to have you on the show uh it' be great for you to give the audience a little bit more about you and your background and how that ultimately LED you to launching open Stock sure so pleasure to connect here originally from South Africa um been in the US for about four and a half years my background's been um as a builder myself as a co-founder especially in the thin Tech space B2B fintech um so over the last 12 years started off from the mobile point to sales system space going all the way to bnpl in the b in the B2B space um and had a lot of experience in advising and growing some early stage fintech companies very passionate about the space which led to Growing quite an expensive Network in the pre IPO um and late stage private company space and finding out quite a big need in Private Stock liquidity which led to getting into lending um and then naturally that led to a much bigger need or much bigger size of a market focus on LPS um in traditional and late stage funds so let's unpack that uh for a lot of Founders we have a lot of early stage Founders that you know they're so focused on raising Venture Capital but once you get once your company gets to a certain scale and a certain size there's this path towards generating liquidity as a private company since private companies save Private longer you know raise more Capital more uh you know privately they're not going public so Founders early shareholders employees are not necessarily getting these big liquidity events and maybe are you know trapped or you have some limitations can you kind of share a little bit more about what open stock is doing for for these for this Market sure thing so it is just as a point of reference it is only for a few companies um but for the general lat companies that are pre-approved we would focus on providing um loans to the specific shareholders for them to do a range of things from exercising options to focusing on outright liquidity to again to actually get some value or tangible value for the stock that they hold that isn't liquid at the stage that's where we focus most and especially as a company founder or a CEO um it's really important to incentivize your employees to get the the right quity needed um and because the secondary Market um has a has a lot of variables in it a lot of people would like to get short-term uh financing to maximize the upside components so this is interesting so most people are probably familiar with secondaries you know hey I early shareholder in ABC company whatever and you sell your shares but the problem with that is you sell you sell your shares you have a taxable event and you lose the upside what you're providing is you know basically liquidity or coll you're collateralizing the options or the equity and providing a loan for them to do as they see fit whatever they they might choose to do with the money but you're kind of allowing them to continue to have that upside correct that's correct yeah but our focus is more on the lp space right now um just where the secondary Market is at this stage interesting so explain that a bit more so only only LPS that have positions in these companies the companies so we we've shifted our Focus primarily to focus on LPS of credible funds late stage um late stage funds from B to a grade and that's where our primary focus is at the moment ah okay so that's very interesting so this is actually opening up liquidity for LPS which has another big problem yeah uh in terms of just no liquidity happening in the last couple years and needing to kind of meet Capital calls you know continue investing in other you know asset classes so that's essentially what you're focused on today correct it's a it's a good Niche I feel it's probably far less competitive than uh you know some of the other categories that might be out there um so you build this business you identify this opportunity how much Capital do you raise to to get this business off the ground so it was a mix of debt and Equity um currently right now we've got a fund behind us with 800 million focused on this asset class um the loans are quite sizable so even though the amount is quite big from a fund perspective the um it's a very big market so so that is growing on that size but that's sort of where we are today and um and from a fund perspective so if I'm an LP in a fund and it's you know kind of year and are these VC funds are these private Equity Funds what type of f private equity and private credits VC we a little bit reluctant based on the risk profile on the stage um but we can and have done many um but more primarily on the real estate private equity and CR gotcha okay so yeah those a little bit more predictable a little bit more stabilized than the volatility of uh Venture Capital um okay so we're getting a good grasp in terms of the the need that you're feeling and obviously you're in a much bigger Market Venture is a nent you know size in terms of the you know alternative markets so you're tapping into a very very large market in terms of creating up an uh liquidity so let's kind of unpack this a little bit more you're a Serial entrepreneur you've built in uh you know companies from before you've identified this opportunity releasing this out to you know LPS to create liquidity um what are you seeing in the market you know right now for why this is such an important product to offer like kind of what's your perspective on it it's just leverage it's all about leverage at the moment so to actually get if you go into the investment and you see the upside in the future even though the liquidity um time frame may be a little bit longer than expected a lot of L of people are still bullish on their Investments so instead of selling at a discount or even being able to sell at all they could rather leverage that position take a bit of an interest rate hit um and find an Arbitrage whether it be an alternative investment whether it be for a personal need um whether it be from a tax efficiency perspective there's a range of different use cases um as they deem like most feasible or whatever is most financially advised but that's sort of where the focus is to give them that flexibility with the Investments they and from being able to have this leverage and and being able to have this as an option for for LPS you know with the markets being what they've been over the last few years is this something that you know is timely for now or is this going to be something that's going to be you know more and more pertinent or were there other Solutions like this but maybe not as accessible um as you're making it well depends on what the asset class is in the fund a lot of banks offer this to their nextedge um well all the clients that they've got relationships with with funds held by the bank themselves um although this is a lot more fund agnostic and asset agnostic solution um for range of high networths or respective different um LPS and funds gotcha and how does the how do you go about vetting and building these relationships with LPS the funds like kind of what's that process how would you know this to say a large family office is it mostly family offices or you dealing with you know institutional uh LP like inss and family officers or High networths um so essentially we would work through them or work through directly to the find got you so you're building these relationships and so you build the relationship predominately with the fund or with the the lp when you kind of go about it's a mix yeah it's definely mix there's a lot of referrals that come from LP to LP or directly with the fund who refers us to the LPS based on the liquidity needs gotcha and from the looking at the different asset classes you know across the board where are you seeing liquidity kind of get tighter and less accessible because you know we hear about the markets in terms of commercial real estate and uh what's been happening in that over the last couple years as you know work from homes to become more popular kind of what's been your what's been your insights in terms into the market in terms of these alternative asset classes I'd say the inside it's mainly it's not necessarily on like the fund it's more on the use of funds so there's a lot of people that have got timely events from maybe a tax perspective they need to pay a certain tax bill or they go through personal events such as divorce or they have that opportunity gain where's um the opportunity cost of not having enough Capital to to deploy on a specific investment at a certain time that's when they need as much liquidity as possible to open up that open up that opportunity so it's r on the use of funds and the time well um I guess going back like from the asset class of it's so it's it doesn't matter really what what asset class you're you're underwriting in terms of the fund like if it's a real estate fund or private credit fund correct um it's more of um underw writing the time of length that they'll need access to this capital is this you looking at like six Monon type terms you're looking at fiveyear type terms and what did some of the unit economics of these of these loans for for family offices are I know with individuals sure so I mean that would Flex roughly between the 25 to 30% LTV um and we do a six to 60 month trim so roughly six months to five years um and so basically I if if I'm a family office I have my position and my cost to Capital call it I don't know if you guys are prime plus or anything of that sort is that kind of similar you know in terms of pricing for for interest rate or you guys uh subprime yeah it it all depend on underwriting we'll give a quote based on that so it can range depending on the who the lender is it are who's the borrower yeah great um so it could be an Arbitrage game for them or you know tax benefit but you know they have opportunity to participate in something has a larger upside it's worth the cost of capital to to to take out this law and take out the C so similar to margin trading for the average retail Trader who whatever has a couple hundred thousand in a margin account they could you know basically amplify that account but at the cost of that interest so they're making bets that have a higher yield than whatever they're paying on that margin interest corre so it's just creating a lot more accessibility but for the private markets more so than you know what's already accessible in the public markets because it's a lot easier to unwrite the public markets yeah gotta so when you look at who you get to work with and you know the the opportunities that you're creating like what kind of excit you most about this market and and working in this this field I think it's just how investors think about their money at specific times of their life um so to have a retrospective look at how some you know investors have P up their life and what they do from a funding perspective and what they need the funds for it's very interesting to see where you can help them from a liquidity perspective and how they see leverage um as less of a risk but more of a utility I think that's pretty interesting um so yeah and I think it's it's really it really comes down especially in markets like this where from a realism realism perspective you can see which um which funds are paying out true liquidity and dividends um and which are truly longterm um and you can see which investors went in there with the true conviction to hold their money for the longer term um and the types of investors that just get inundated with a bunch of opportunities that just don't have enough liquidity to supply and are simply looking for the ability to make more good decisions so there's a lot of people that we've focused on providing liquidity too and we've seen that they just had really good luck or really good track record of Investments and all they want to do is open up the ability to do more and that's what we enabling them to do and obviously you know anonymized but you know what are some examples of some interesting deals that you've been able to facilitate due to you opening up access to liquidity to the to these LPS like what are some interesting like you kind of mentioned high level but you know anonymizes as much as you want but like what's an interesting like kind of outcome that you enabled I think one of the most interesting ones was just how a specific investor would utilize that leverage in order to reinvest it another leverage and another opportunity that provided by yield so for instance if they were to lend it say 10% perom and they would have fin a yield um for a different type of asset have provided 16% they've they've used our money to make 6% net um within a year so I think that was quite quite interesting to see how it's used in certain times to seize an opportunity and actually make a profit gotta so you simple AR kind of Interest Arbitrage uh opportunities and being able to capture that spread off what essentially is free money because they're they're amplifying their or they're kind kind of I guess they're not really reducing their cost bases their cost bases is staying the same but they're amplifying the impact that it has they're earning an additional 6% on their cost basis that is lower than what it would have been if they had to deploy new liquidity into that deal because 6% on you know your original B you whatever a million dollars is you know okay but if you have a million dollars working and making you whatever 15% and then you're able to take out another 250 and earn 6% on top of that 250 at no additional cost I would and obviously minimal risk obviously you're overleveraging you know not over but extending yourself and hopefully going into safe Investments but um I guess what what kind of return profiles do you see for LPS in this space like you kind of mentioned the the 16% um you know in the private credit markets you know what kind of return profiles are you seeing LPS capture right now with interest rates as high as they are i a y between 14 to 18% they're looking for for like mid mid to late teens terms of interest rate like that's sort of where um they'd look for but I mean it all depends on on like underlying asset class um so it really does depend like yeah I don't have like an exact answer for that but yeah we not doing any private credits so we doing across the board but we know what ours are so that's where we focused so some yeah some deals producing you know for 1418 on a high level do you see is that Neta fees or is that before fees n so phenomenal those are they can yeah and uh private credit being collateralized it's you know depending on the you know the find how they run uh you know there a little bit minimized risk in that uh as opposed to you know Equity investment uh so 14 to 18 is an incredible you know opportunity to be a part of do you see those types of returns accessible to you know smaller investors retail investors or like kind of more like a uh High number individual but maybe not a you know family office scale I don't know to be honest I don't know could access those returns at the moment I'd be curious to know which but I don't know the answer yeah my understanding is no you know that that would be my understanding is you know this those typically are reserved for larger funds larger amount of capital being deployed at scale you know top tier managers at least from my experience yeah um and do you see any of your uh transactions or anything being allocated to like say like the more riskier asset classes in terms of crypto or any other types of uh they take this leverage and put it into any other asset class that maybe not stabilized as private credit or real estate and would you underwrite something like that so first part of the question we um so we don't restrict the use of funds they can use it for whatever they deem fees they deem fit so I'm not too sure what the in uses were of some of the transactions but I'm sure that they they may have fall in Within These brackets I'm not sure um and we tend to start stay away from a bit of these high risk assets at the stage um so Mo focus more on conservative um more traditional typ funds gotta and for funds that are out there whether there are um like I said any type of the asset classes that we've mentioned earlier like what should these fund managers know if they're GP they have LPS kind of knocking on their door saying like when am I going to get my returns when are you going to start to you know putting out distributions like how do you work like you know kind of walk us through how you help those GPS alleviate that stress in terms of connecting them to to the LPS sure so we would simply got in an agreement to get the consent of the GP we would underwrite the fund and from there they either they could communicate or we can connect directly to the LPS based on the valuation that we deemed fits in the fund um and then we could provide loans based on standardized to and to funds have their own way of marketing up their assets and underrunning their their themselves and kind of whatever their you know assets under management or whatever the fund size is fund value like do you come in and do a completely independent audit of their their assets got it we go through an underwriting process but we do do come up with that one too did you know that most Founders waste days of their lives chasing the wrong 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VC now let's get back to the show got it what's kind of the disparity that you would see between what they claim is their net asset value versus what you underwrite do you see a giant disparity often or is it usually a line D I mean it's variable but yeah I mean depending on the asset class of course VC there would be a bit of a disparity but it really depends after the underwriting there's not that an answer for that yeah I guess I the only reason I asked is just because with and you obiously not necessarily being your main focus but icvc being that you know that's a bigger problem just the difficulty of underwriting those assets um and you know going off like last round you know type valuations might not always be the most relevant uh way to underwrite these deals especially as we look at the the recent bolt deal where the I think Ryan brlo uh had the company valued 11 billion in 2021 had everyone lever up and buy you know exercise or options and now the company is just recently valued at 300 million you know quite the 97 there was like a 97 98% uh valuing of the company uh did you did you hear about that I did yeah I did yeah so what's kind of your T how do those types of things happen in your opinion well it's a private company um we didn't work with him so I can't comment on that particular circumstance um yeah it is just what it is I don't know I don't know how to answer that fair enough yeah it's a it's definitely been an interesting uh Saga to kind of see unfold and and see how that's impacting both you know the employees as well GPS that erased deployed to Capital into that F uh company as well as you know obviously the LPS thinking they had massive markups and yeah this amazing tvpi numbers and then ultimately not seeing those uh you know kind of fruition um so given your experience as an operator in the past uh and you know building companies raising money uh how did that ultimately help shape your perspective of doing what you do today yeah I think like quite a few different aspects I think like if you don't raise the right VC money or the right funding money it's more of like debt as opposed to equity and state value agers um because the money needs to go back in some stage of form um I think product Market fit critical I really just being real about that product Market fit up front is is crucially important I think not being yeah I think also just being aware of what can be a feature as opposed to a business was really important even from the B2B or the b2c space I've seen a lot of deal flow with people they got a very unique idea even at the event that we were earlier um but there's a lot of larger companies that you could just pick up could either turn this on as a feature there see Market size growing rapidly as opposed to just assuming that you know we could white label to that company yeah I think I don't know that there's not a standardized checklist I just think it's now more intuitive after all these years when you going into something or you're going through something you just it's like a set sense you just pick up certain things um but the best thing is just getting your head hit and just diving in um being as prudent as possible I really think getting perspectives from players in the space even speaking to competitors that are bigger than you in the beginning like being a little bit more vulnerable um not trying to dulge in any information by both ways but just being open getting thoughts um yeah I think that's pretty yeah I think those the high level things I mean there's a it's a long list but it's yeah no I think it's interesting to mention the idea of like talking to the bigger players I think a lot of Founders struggle with the idea of oh they're going to steal my ideas or if I talk to people they're gonna you know take my my vision away from me or things along those lines and you know you're coming out and saying like no it's could be could be advantageous to to have the chat and share your ideas and revise and evolve uh the concept of the business um yeah what do you say to Founders at are afraid of having their ideas stolen by having those conversations well I wouldn't I wouldn't recommend going direct um every time to a competitor look I mean it depends what um it depends on it depends on the idea but I think if you can expose yourself to potential competitors that you know would either build the solution or just get their thoughts in the space um without trying to like provoke too many too much IP it's a tender discussion it depends on the course depends on your analy you can go up front and just say hey I'm building the space building a very similar business to you what have you learned you're thinking the space competitors you help each other um yeah it really depends I don't have the right answer um my gut instinct is to like speak be a bit more open see how you can collaborate um so yeah it all depends on that yeah I'm more in your Camp uh share and be transparent and learn and involve the more you talk about it the more you pitch it the more I put it out there the more ref find it becomes and the more relevant it becomes because when you kind of work it in your head over and over again but don't actually like put it out in the world you might be missing valuable points of input data that can you know refine the idea and make it a more relevant uh opportunity like and also regulation I mean like that's something that like people really undermine just it could be with rates it could be with um user laws customers um I think it's just really really to good to be aware of that space like there could be certain regions where your product is Fe able to enter and grow there could be some where it's a lot lot more restrictive like I'm not in crypto but I see that crypto is very regulated in the USA so there's other regions that are more feasible um yeah so from like a regulatory perspective of the landscape that's crucial as well like when you were conceptualizing open Stock and you you come from a background of building companies and you're seeing this opportunity like how long did it for you you know what was that process like in terms of getting the idea that you had and kind of getting it to the point where you you work with an $800 million you know uh hedge fund to to that scale and to facilitate these level of transactions that's not something that usually happens overnight like what was that experience like kind of getting you know from it's an idea in your head to you know transacting and was yeah but the act the initial idea wasn't novice at all um there were quite a few larger private lenders doing this in small chunks or ad hoc basis to clients that had relationships with for over years so if you could do this at a more scalable perspective um it could be more benefits um but yeah as the markets change volatility change valuations Etc so it's all a learning perspective overall did any kind of incumbents push back on what you're trying to do or did you get any friction from Target customers on your approach or how you're doing it yeah th% what was that like what what was that experience like you got to just keep the relationship and you got to be respectful and keep trying with others it's the only thing you can really do fair enough um so what would be some parting advice for um call GPS that are you know growing their fund devel you know deploying their fund working on what they're doing and having an issue with either LPS or um yeah what would be your ADV your parting advice to to GPS on this front I'd say I mean make managing expectations with your LPS as to whether they're going to be value add or they whe they're going to be passive is very important getg go understanding their potential liquidity constraints or liquidity requirements um over time is important whether it be from secondaries lending certain things like that I think it's just important to understand um what they see this investment as some people just see it as a favor some people see it as there could be multiple reasons but I think just getting an understanding post transaction because you want to deter your LPS is just understanding why did they invest um I think that would be quite quite good um I mean indirectly to promote our products we we provide the alternative liquidity that's just something that's just we're just an option there's no liability to them but it's always something great or not it would be a pleasure to work with more GPS um but that's what I can say I haven't owned and operated a large fund myself um I think everyone goes through their own Journey from emerging managers based on the sector based on the type of LPS they've got especially institutional to post exit founders Etc yeah so it'll be very difficult for me to give like a unified answer but I think just getting um just managing Communications and managing expectations with your respective investors um and always asking for like um from a growth perspective whether it's forther LPS or distribution potential for the port CES you invested in I think that's really critical I think every every fund needs that ad needs that Advantage but I think every fund's got their own unique formula but those that's general advice from my perspective I can give you bring up an interesting point it sounds like common sense but I think in practice it's a lot harder not as often talked about you know especially on the mentor side is kind of why is that LP investing and what their expectations are in terms of returns because you know large LPS they're they're not just investing in uh fun they're investing in dozens if not hundreds of funds you know in terms of diversification and deploying capital and with that and all the different asset classes they have to have this portfolio construction uh we have these Capital commitments at these times to you know stay consistent with either you in participating in the next fund of a trusted manager or you know they need to meet certain obligations and uh as a GP knowing kind of what that schedule looks like and knowing your your LPS well enough to know when and how you will deliver you know distributions or returns is something that you at least me not being a GP and not hearing these conversations often it sounds something that's actually pretty important for for GPS to really understand and document properly so that they know if they're expected to deliver distributions at a certain date or on a certain time schedule that LP might be relying on it and if they don't deliver something like uh open stock can come in and kind of fill that void to make sure that you know the the engines keep moving the cash keeps flowing so um well Alex I appreciate you you being on the show any any last minute advice or anything that you would like to share for for the audience to know more about you know what you're up to at open Stock yeah sure from the from the fun I mean very happy to connect with any GP allp um I don't want to over promise any expectations because we have to get comfortable with the fund Etc um after the underwriting so we yeah we only we only Tak in about 90 10% of um the funds that we interview um but very happy to communicate regardless and go through the process just to issue terms if it's feasible um yeah I think I from a business perspective like that's a from a personal perspective the only advice I can just share is just like don't believe in narratives with anything I think when it comes to business relationships or people I think like just don't build up this narrative in your your mind based on the individual's background or the funds background or news Etc I think like just go in with like an open mind and open art into like engagements whether it be competitors sales Etc I think just kind of like listen more and then um make a decision based on that and previous learnings interesting you say don't buy the narrative is like don't build the narrative um something I was very guilty of moving to this country um from South Africa and you just you build all these preconceived narratives of people and their backgrounds and the fans and then there's always a mismanagement of expectations and especially when you get disappointed with others it's mainly just a fact of you being at fault because you put an expectation or a narrative that bay um so I think that's just more like a personal learning I've taken um so yeah that's actually some really good parting advice I I appreciate you sharing that I think that is a very much a real uh concern or problem that exists in terms of of what leads to mismanaged expectations um and actually I was I was going to wrap on that but you you opened up uh something I thought I would unpack a little bit more so you only work with about 10% of the funds that you that you underwrite 100% we can't any because at the end of the day fund doesn't go um we have to have a good book that's very critical we very prudent with our investments be very prudent with the the loans we make so yeah it's crucial that um our book stays clean um even though funds to be credible and just because a reputable fund has invested alongside a particular LP Etc doesn't mean that the business or the the particular portfolio would do well so we have to be extremely prudent um with the underwriting process to ensure we mitigate risk so I know that every fund's different but just like what are some of the common um attributes of a fund that makes it that passes the cut it's it's pretty L we've got over like 200 data points that we look at uh so I can't through the whole list now but just general performance I mean it's more quantitative than qualitative um but you have to look at it from like a PE or growth stage investment lens because essentially if you're lending against a portfolio or a particular fund similar to making an investment from an equity perspective so you have to have the same underwriting investment pieces that are a fun that be buying that secondary position art as well um so it's very complimentary from an LP buying position gotta no that's super valuable insight and I imagine that top percent uh top 10% of funds who those are amazing funds to to be working with and I'm sure attract lots of capital and lots of options uh so uh with that Alex I really appreciate you coming on opening up our our minds to this this other side of the the transaction and the the fun world and capital worlds uh so I appreciate you sharing your insights and sharing your background so thanks for being on the show Alex thank you Jason appreciate thanks for listening to the show today we hope you learned something valuable and if you did be sure to let us know in the comments or by hitting that like button and if you're a Founder looking to raise Capital then join us at thunder. 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