Derek Minno (interviewer and author) — Derek has served as a GP in a domestic VC Fund; a GP in an international PE Fund, an LP in multiple PE and VC Funds, and a C-level executive in VC-backed companies. He is the President of Point Capital.
Derek Minno developed a series of interviews with leading managers focused on Venture Capital (VC) Secondaries. He published a book with these interviews and some bonus chapters. The book is considered one of the best on this subject and can be downloaded for free here.
Given the popularity of the VC Secondary Series, Derek has expanded with interviews focused on Private Equity (PE) Secondaries. In this release, Derek talks with Joncarlo Mark, founder of Upwelling Capital Group. Joncarlo talks about Upwelling Capital and their perspective and work in the secondaries industry. Joncarlo also discusses the early days of secondary investing at CalPERS and the role the Institutional Limited Partners Association (ILPA) has played in the evolution of secondary investing.
- Please tell me about your background?
Prior to forming Upwelling, I worked at CalPERS for approximately 12 years helping manage the private equity program. Before that, I worked for six years in an operating role for a New York Stock Exchange company called Premier Industrial Corporation, a manufacturing and distribution company. Between Premier and CalPERS, I went to business school and transitioned from a world of sales and general management into finance and investments. Interestingly, the family that founded Premier has been a long-term investor in private equity, literally since the late 80s or early 90s.
- Please tell me about Upwelling’s strategy?
Founded in 2011, Upwelling is a registered investment adviser that specializes in providing liquidity solutions to a wide range of institutional investors, including both LPs and GPs. The three main pillars of our business are secondary transaction advisory, institutional investment advisory and principal activities. With regards to the latter focus area, Upwelling invests in secondaries mostly in the form of GP-led transactions and serves as a fiduciary in GP transition situations. In summary, we are comfortable with rolling up our sleeves and dealing with complexity.
- You were involved early in the Institutional Limited Partners Association (ILPA) and remain involved, how does the ILPA look at the secondary business? How has the Institutional LP’s attitude/acceptance of secondaries evolved?
The Institutional Limited Partners Association (ILPA) is a global organization representing limited partners (LPs) from diverse backgrounds, including sovereign wealth funds, family offices, pensions, foundations and endowments. With over 650 members globally, ILPA focuses on networking, education, and advocacy, especially around private equity best practices.
ILPA has played a key role in helping LPs understand the evolving secondary markets, particularly GP-led secondaries, which offer investors a range of liquidity options mostly associated with continuation funds. Initially met with skepticism, these transactions have become more mainstream, in part thanks to ILPA’s push for transparency and process standards. ILPA has also contributed their members’ voice to help shape certain provisions in the SEC proposed Private Fund Rules. Although the new regulation was not formally enacted, many of ILPA’s recommendations are being implemented in the formation of continuation funds that bring more clarity to these transactions, helping LPs make better-informed decisions. We are now starting to see more LPs step up as investors in CVs versus simply selling as a default. In addition, through ILPA’s executive education platform, the ILPA Institute, member organizations can strengthen their knowledge about key industry developments, including those associated with the secondary market. I have served as an ILPA instructor for several years.
- During your tenure at CalPERS, did secondaries play a role? How did you invest in secondaries then?
During my tenure at CalPERS from 1999 to 2011, secondaries played a role, though the secondary market was still in its early stages. During that time, most secondary transactions were LP trades, where LPs would sell some or all their portfolio stakes to buyers like Lexington and Coller Capital. CalPERS was a significant investor in both firms, who were early players in this market. These secondary firms not only purchased LP interests but also sponsored spin-out transactions, such as Bridgepoint Capital in the UK.
In the early 2000s, regulations like the Volcker Rule came into play, which limited banks’ ability to make LP commitments off their balance sheets. This led to many banks divesting their private equity portfolios, including a portfolio owned by JP Morgan, which my partner, Eric Green, was tasked to help monetize.
However, by the late 2000s, secondary transactions became more common as a strategic portfolio management tool. Public pension plans, such as the Michigan Retirement System and, later, CalPERS conducted major secondary transactions. The CalPERS transaction included the sale of over 80 funds with a total exposure of $2.25 billion and signaled a shift in how secondaries were viewed. Prior to this, selling in the secondary market was often seen as a last resort or something done out of necessity, but this transaction demonstrated how secondaries could be used proactively to rebalance portfolios.
In hindsight, the 2007-2008 transaction was a success for CalPERS. The portfolio was priced in late 2007, just before the global financial crisis hit. Had we waited another month, it’s likely the portfolio wouldn’t have traded at all, given the market conditions during the crisis. The discount on the portfolio was less than 10%, which was considered favorable at the time, especially given the size and quality of the assets. Ultimately, it was an effective portfolio management move for CalPERS, allowing us to consolidate relationships and refocus on high priority investment opportunities.
- How have secondaries evolved? How has your attitude towards secondaries evolved?
Secondaries have evolved significantly over the past few decades. As mentioned earlier, initially, secondary transactions were mostly LP trades, and somewhat limited to select institutions such as banks or institutional investors impacted by regulatory changes. During this period, the market was relatively small.
However, the secondary market has matured and diversified considerably since then. Just as the overall private markets have grown, the secondary market is broad in its ability to provide liquidity in a variety of shapes and sizes. One of the most significant developments has been the rise of GP-led continuation vehicles. This “new technology,” so to speak, allows general partners (GPs) to retain ownership of their best-performing portfolio companies and continue to grow them beyond the typical holding period, offering LPs an offramp along the way. Proceeds from GP-led secondaries are often used for shareholder consolidation or for growth strategies, such as add-on acquisitions. As a holding in the original fund, sometimes the GP’s ability to execute this kind of growth plan is constrained by capital or concentration limits. This approach has fundamentally shifted the way secondaries are viewed, transforming them into a sophisticated portfolio management tool.
The scope of secondaries now extends across multiple asset classes, far beyond just private equity and venture capital. Today, the secondary market touches everything from private credit and real estate to infrastructure and even GP stakes. It’s become a critical tool for managing portfolios across a wide range of investments. As secondaries have become more mainstream, institutional investors have increasingly integrated them into their portfolio strategies, using them to rebalance exposures, exit aging assets that no longer generate returns, and reallocate capital into higher-performing opportunities.
One of the key drivers behind this evolution is the realization that many private equity and venture capital funds stop generating meaningful value after about 10 years. Since most funds have longer lives, sitting on assets that are no longer appreciating can be detrimental to a portfolio. The secondary market allows institutional investors to recycle capital from these older assets into more promising, higher-return investments. It’s a proactive way to ensure that portfolios remain aligned with their long-term goals.
Secondaries have become an essential tool for optimizing returns, cleaning up underperforming assets, and reallocating capital in a way that maximizes growth potential. Instead of focusing solely on minimizing discounts, it’s become clear that understanding the intrinsic value of each asset is crucial. Sometimes, taking a larger discount on an underperforming asset is the smarter move if it means freeing up capital for higher-growth opportunities.
GP-led secondaries represent a major shift in how I view portfolio management. These transactions allow GPs to retain control of their best companies and extend the value creation process. By doubling down on well-performing companies and giving them the resources they need to grow, GP-led continuation vehicles have proven to be a highly effective way to manage portfolios. It’s no longer just about selling off assets for liquidity—it’s about strategically managing portfolios for long term success.
Furthermore, the secondary market has become much more sophisticated in terms of pricing. While there used to be an overemphasis on avoiding deep discounts, smart investors now realize that sometimes accepting a higher discount on less valuable assets can be a better long-term strategy. By conducting intrinsic valuations of their portfolios, investors can make more informed decisions about which assets to sell and which to hold onto, based on their future growth potential.
Finally, one of the most significant changes I’ve observed is how secondaries now span across multiple asset classes, including private credit, infrastructure, and real estate. This diversification has made secondaries a far more versatile tool, allowing investors to manage a wide range of investments more effectively. It’s not just about private equity anymore—secondaries have evolved to play a crucial role in managing almost every part of an institutional portfolio.
In conclusion, the secondary market has evolved from being a niche tool to a highly sophisticated and essential part of modern private markets portfolio management.
- For secondaries, what is the target return? Target duration?
Historically, LP-led secondary funds have generated net returns of around 17-18%, with a multiple of approximately 1.5x. This data, sourced from Pitchbook and covering the period between 2012 and 2019, reflects typical returns for transactions involving the purchase of diversified LP portfolios. These types of secondary deals were traditionally seen as lower-risk due to their broad diversification across multiple assets, making them a popular tool for portfolio management. In these LP led secondaries, liquidity is typically expected within a 3–5-year period, as the portfolios gradually wind down and the underlying assets are exited.
However, in recent years, there’s been a significant shift with the rise of GP-led secondaries. GP-led transactions, which now represent approximately 50% of the secondary market, have brought a different return profile and set of expectations. Unlike the more diversified LP-led deals, GP-led secondaries are typically more concentrated, often focused on single-asset or a small number of assets being rolled into continuation vehicles. This concentrated nature inherently carries more risk, but also offers much higher potential returns.
Research and market data indicate that GP-led secondary transactions tend to outperform traditional secondary funds, as well as top-quartile primary funds and co-investments. Given the concentrated focus on high-performing assets within a GP’s portfolio, the expected returns for these GP-led secondaries are often significantly higher, with target return profiles in the range of 2.5x multiples and 25% IRR. All that said, it is still relatively early days for the GP-led market and there will be unsuccessful transactions which will impact returns in certain cases.
In terms of duration, both LP-led and GP-led secondaries typically aim for liquidity within a similar 3–5-year timeframe, though GP-led deals are more strategic in nature, often involving high-value assets that the GP wants to hold and grow for a longer period. These assets may undergo shareholder consolidation or acquisition strategies that drive additional value, further enhancing the return potential for investors who participate in the secondary market through GP-led deals. Therefore, while LP-led secondaries offer steady, more predictable returns, GP-led transactions represent a more dynamic part of the market with a higher risk-reward profile.
- Venture Capital secondaries have not had the same acceptance as Private Equity secondaries…why? Is the Venture Capital model broken?
Venture Capital (VC) secondaries have not gained the same acceptance as Private Equity (PE) secondaries, primarily due to differences in the nature of the businesses involved. In PE, secondary buyers deal with mature, revenue and EBITDA generating companies, which makes it easier to assess risk and predict returns using established financial metrics like earnings multiples. In contrast, venture-backed companies are often early-stage, pre-revenue, or focused on growth over profitability. They may also need more capital after the secondary transaction, making it harder for secondary buyers to evaluate them with the same level of confidence. This uncertainty, coupled with the higher risk associated with unprofitable businesses, has made VC secondaries less attractive to a broad range of investors.
Another major challenge is the lack of transparency in the VC market. Secondary buyers in VC often struggle to gain access to detailed financial or operational data, complicating their ability to perform thorough due diligence. This lack of information increases investment risk, discouraging many from entering the VC secondary market. While some specialized firms have the relationships to access valuable
information on these private businesses, the broader market is more limited. Despite these challenges, there has been growing interest in VC secondaries. Many venture-backed companies have matured and become more appealing to secondary buyers as they have real revenue and may be profitable. However, with traditional exit routes like IPOs and M&A limited, venture managers are turning to secondaries as a liquidity solution for their investors. Historically, venture funds have lower DPI (Distributions to Paid-In Capital) ratios than buyout funds, leaving much of their value unrealized.
In summary, although VC secondaries face higher risks and challenges due to the availability of portfolio company information, they are becoming a more viable tool for liquidity as exit routes remain constrained. Venture managers are increasingly recognizing their importance in providing liquidity to LPs, a trend likely to grow as the market evolves.
- Upwelling recently published research on clawbacks. You do not hear that termm associated with secondaries…should it be a more important consideration?
In our recent research on clawbacks, the issue of their relevance to secondaries is becoming more prominent. Historically, secondaries haven’t been closely associated with clawbacks, but they should be considered due to recent market trends. Over the past decade, we’ve seen a significant increase in valuations, especially up to 2021. However, after that peak, there was a steep drop in public comparables, which, combined with rising interest rates, has created a challenge, particularly for buyouts. As valuations of companies purchased at peak valuations come down, managers who may have taken liquidity earlier in their fund’s life are now facing scenarios where their fund’s returns have fallen below the hurdle rate, often around 8%.
For secondary buyers, this introduces a dilemma. If a clawback is in place, it may discourage managers from selling companies in normal course since they may have to return distributed carried interest back to investors. As a result, secondary buyers must account for potential delays in exits and the possibility that assets could be held longer than anticipated. This behavioral factor, tied to the risk of a clawback, can affect both the timing of exits and the valuation of fund portfolios.
In GP-led secondary transactions, clawbacks also come into play. When a manager moves a high-quality asset into a separate continuation vehicle, it may impact the remaining investments in the original fund. If there was a potential clawback for that fund, removing the best assets could make it harder for the fund to recover and pay off its clawback obligations. Therefore, when considering such transactions, secondary buyers need to assess whether these moves could hamper the ability of the original fund to meet its clawback requirements. This may impact the LPs willingness to consent to the transaction.
Ultimately, clawbacks should be a more significant consideration in the secondary market. Both secondary buyers and fund managers need to have transparent conversations about potential clawback situations, especially given the valuation fluctuations seen in recent years. It’s not just about avoiding deals with clawbacks but using the situation as an opportunity to realign interests between GPs and LPs. Rather than treating clawbacks as a roadblock, LPs, buyers and the GP can negotiate a fair resolution and ensure exits happen in a timely manner, even if a clawback might be in place.
Upwelling recently published research on Clawbacks
https://upwellingcapital.com/research/
- Any predictions on the future of the secondary market?
In the future, I expect the secondary market to continue its growth trajectory, especially as it becomes an increasingly vital tool for generating liquidity in private market portfolios. Research from 2023 shows that GP-led secondaries accounted for about 10% of the total liquidity generated, even though overall liquidity in private markets is only around a third of what it typically is. This reflects the unique market environment, where traditional exits like IPOs and M&A have slowed, making secondaries a crucial tool for liquidity. Multi-asset managers who have secondary platforms are also reaching into the retail market to raise capital, which will add liquidity to the secondary market.
As private market programs grow within institutional portfolios, the need for liquidity options becomes even more critical. The secondary market provides flexibility for both GPs and LPs. In some GP-led cases, it’s the LPs, rather than GPs, who push for liquidity, and the secondary market offers a viable solution, even when GPs have limited control over portfolio companies.
In terms of specific predictions, the secondary market is expected to expand in the venture capital space as well, continuing to evolve into a broader mechanism for liquidity. Another significant trend is that LPs are beginning to step up as buyers in continuation vehicles (CVs), rather than just being sellers. This shift is partly driven by a change in internal policies and procedures, which now allow LPs to participate as buyers in secondary transactions.
Last, although not discussed earlier, structure liquidity solutions will continue to play a role in the secondary market in the form of NAV loans and Collateralized Fund Obligations (CFOs).
As the market evolves, I expect organizations like ILPA to offer more education to LPs, teaching them how to underwrite and structure CVs. Some institutions are already taking the lead in participating in these transactions, and this is likely to become more common. GPs, in turn, should welcome this LP participation in their GP-led transactions, as the capital comes from long-term partners with whom
they’ve built strong relationships. Overall, the secondary market is poised to grow both in volume and complexity, with LPs playing a more active role in driving its development.
- What is hard about this business?
The challenge in the secondary market lies in its complexity and the evolving nature of opportunities. Investors face a wide array of choices, but in a difficult capital raising environment, getting deals done is tricky. For LP trades, the primary difficulty is often in pricing, especially in venture and growth sectors, where significant discounts remain. For smaller businesses, like those in the lower middle market, underwriting is particularly challenging due to the lack of detailed information. Firms must possess the necessary skills to evaluate smaller companies effectively.
- What would you like to change about this industry?
I would love to see more LPs become active and engaged buyers in GP-led transactions. Over the past few years, the market has evolved significantly, with GPs becoming more transparent and proactive in communicating with their LPs, especially when proposing a GP-led transaction. GPs are now coming to LPs earlier in the process, often involving third-party advisors to ensure there is independence and a structured approach to maximizing the value of the assets. This increased transparency has been beneficial, but there’s still much room for LPs to play a bigger role.
However, a major challenge is that most LPs currently do not have the commercial capability or internal resources to lead transactions of this kind. They tend to rely on external secondary funds, which often come with a higher cost of capital due to carry charges. Some LPs are starting to develop the capacity to take on leadership roles in deals by setting prices and underwriting transactions, but the vast majority default to selling rather than rolling over their investments with the GP.
A more proactive stance by LPs would not only improve market efficiency but also present them with more opportunities to stay invested in high-potential assets. A shift in mentality from “sell” to “roll” could allow LPs to better align with GPs and participate in the continued growth of companies they initially invested in, rather than exiting due to liquidity needs. This evolution would create a more dynamic, efficient, and collaborative secondary market overall.
