Investing Billions - E216: How the $100 Billion Continuation Vehicle Trend Is Changing Private Equity

Episode Date: September 22, 2025

How can continuation vehicles and independent sponsors unlock structural alpha in private equity when traditional buyouts are struggling with low DPI? In this episode, I go deep with Paul Cohn, Co-Founder and Managing Partner of Agility Equity Partners, on why continuation vehicles (CVs) and independent sponsor deals are reshaping the buyout landscape. Paul explains how CVs let GPs hold their best companies longer while still providing LP liquidity, why the lower middle market offers outsized return potential, and what makes independent sponsors a fast-growing segment of private equity. We cover alignment dynamics, incentives, real-world deal structures, the findings from the HEC Paris study on CVs, and the lessons Paul has learned over 15+ years investing in this niche.

HEC has done the most comprehensive study that I've seen. And they've collected data on 300 CVs. And these are CVs that were created from 2018 to 2023. And what they found, the bottom line, is that CVs had a higher return than buyouts of similar vintage years. They had a higher DPI, so they were delivered cash back to investors more quickly than buyouts. And they had a lower dispersion of returns. and so they're less risky than the buyouts. Welcome to the How I Invest podcast where we explore how top institutional investors

make their very best investment decisions. Today, I'm speaking with Paul Cohen, managing partner at Agility Equity Partners, where he leads investments across the private equity landscape with a focus on the fast-growing continuation vehicle and independent sponsor market. We dig into the explosive growth of the CV market, the institutionalization, of independent sponsors and the overlooked opportunities in the lower middle market. Without further ado, here's my conversation with Paul. So tell me about the size of the CV or continuation vehicle market today.

So the size of the market in 2024 was $70 billion. And to put that in perspective, the size 10 years ago was $7 billion. So it's just been growing dramatically. From my understanding, the continuation vehicle market grew 30 percent. in the first half of this year. Tell me about that and give me some numbers on that. Yeah, that's right. So it grew 30%, the first half of 25 versus 24.

So it's grown to about $50 billion this year versus 31 last year. So it's on pace, you know, to hit $100 billion versus 70 last year. It still continues to grow. Interestingly, versus buyouts, the amount of, if you measure the amount of dry powder to deal done and buyouts, it's about kind of four to one. And if you look at it for secondaries, and we don't have it specifically for CVs, yet it's close to one to one. So the market's been growing, you know, as fast or faster than capital coming into it. It's really a capital-constrained market. That's one of the concerns in the market right now is there's no DPI and large buyouts

and that there's too much capital going after too few opportunities. In fact, I just spoke to a fairly large CIO, and he mentioned that they expect the investment period for large buyouts to be closer to four to five years. And just to give you context in 2021, it was 18 to 24 months. Wow. Yeah. Managers, even though they have a very strong incentive to deploy and to raise more funds and to show that they were working for their management fees, they still are taking a long time to deploy it in large buyout. Yeah. And if you look at the DPI, the cash coming back to investors, since really the 2018 vintage, it's been really low. It's been really low. So there's been a famine.

And just taking a step back, how would you go about simply explaining what a continuation vehicle is? We've sized the market, so I guess it does make sense to explain what the heck we're talking about. So continuation vehicle, the easiest way to explain it is just to use an example because it's a little esoteric. So I'm going to use an example of a KKR fund. I'm making this up.

It's not actual. But, you know, say KKR, a buyout fund, you know, has a great company that they invested in three or four years ago. The company has performed really well and might be their best company in their portfolio. And rather than sell it to another private equity fund or strategic investor, you know, they like the opportunity to play forward a company they know well. So what they do is they capitalize a new vehicle, the continuation vehicle, which is a limited partnership just like theirs. and they're the GP of that vehicle. They raise capital from institutions like Agility Equity Partners, my firm, to buy their company from their fund.

So it is an acquisition. They are selling their company out of the existing KKR fund to this new single asset entity that's going to hold the company capitalized by new investors like, agility equity partners to enable them to continue to own that company and to benefit from its growth. Tell me about what the incentives for somebody like a KKR would be to hold that asset in their current fund, and what are the incentives for those partners to now sell it to continuation vehicle? To start with KKR is kind of at an inflection point where they can't hold it in the current

fund and continue to grow it. So the fund may be, you know, at its fifth, sixth, seventh year, it doesn't have more equity capital to continue to grow that company. And so it's at a natural point where they would exit the company. And in the years past, you know, they'd sell the company. So instead, though, the KKRGP says, gosh, this is a great company. I'd rather not sell it. I'd rather own it for a few more years. but, you know, I need to give my limited partners liquidity for their investment.

So they use the CV tool to be able to accomplish both of those things, holding on to a great investment they know well while giving liquidity to their limited partners. There's an interesting positive selection here, the opposite of adverse selection, in that they're choosing not to sell the asset and they want to hold it and they want to also roll up their carry into the vehicle, which I know is a huge term for you guys. In which cases would there be adverse selection in that the incentives are aligned for them to do a CV

even though they might not love the deal? Does that ever happen? And that's a large part of our diligence is making sure, you know, what we tell our investors is that we have the opportunity to invest in the best companies, you know, of the private equity firms with the positive signaling that you're mentioning

that the private equity firm wants to hold on to it. Yeah, but you know, you have to do your diligence because, you know, not all these companies, you know, are great companies, at least from our perspective, maybe a company that's subject to, you know, cycles and it may have, have customer concentration. It may have other issues. And frankly, what we're seeing a lot today, because the markets are so backed up is we're seeing companies that have had a failed auction process that the GP says, is, okay, well, then I'll do a continuation vehicle on it. And by the way, I want to do the continuation vehicle at the same valuation I couldn't get in the failed auction process. So, you know, that's not a good deal for us. That's not alignment of interests. Large buyouts have so much dry powder. And if you're not able to sell that through a process, that is not a good sign in this market. Right, right. Yeah, these are high quality companies we're investing in that, you know, should be able to sell in any market.

And actually, you know, we'll talk about it later, but our DPI kind of shows that because, you know, our DPI is very strong because these are very high quality companies that can sell, you know, even in this market. So maybe you could double click on the process from going from a fund to a continuation vehicle. Who are the buyers, who are the sellers, who's rolling their? capital, who's net new capital. So walk me through kind of a basic rudimentary explanation of the flow of funds. Sure. Well, the buyer is the continuation vehicle. So the first flow of capital, if you will, are institutions like agility invest into that CV. We capitalize the CV. And then that

CV is the buyer that, in my old example, you know, buys the company out of KKR. So from the KKR's fund perspective, it just looks like they're selling a company, just like any other company they'd sell in their portfolio. It just so happens they're selling it to themselves, but with the new investor base. And then ultimately, the capital that the CV uses to buy the company with the fund, you know, trickles down to the limited partners. Now, there are some nuances to that, and you actually mentioned one, is, you know, let's use some numbers. Let's say the KKR bought this company for $100 million originally three years ago.

They want to do the CV, and now the company's worth $400 million. So the $400 million goes to the KKR fund from the CV. CB raises $400 million. A CV actually raises, say, $480 million because they also want to raise growth capital. but and then 400 of it goes down to the KKR fund to buy the company. The GP is owed carried interest, 20% of that, 20% of the gain. So they bought it for 100, sold it for 400. There's $300 million a gain, 20% of the gain, $60 million.

The GP doesn't take money off the table. You mentioned this before. The GP rolls that $60 million into the CV, and it's their investment. into the CV. The LPs, you know, get the $340 million, if my math right, $340 million flows down to the LPs, but the LPs can choose instead of taking cash to roll their capital also into the CV. So if they decide they want to be a buyer, the smartest people around the table that are closest to the company have decided they would don't want to sell. So maybe the LPs want to earn another two, three times on their money.

They have the opportunity to roll into the CV also, or they can take cash. Most of them take cash. I had the CIO of an endowment telling me that by default, she was a default yes in CVs. In other words, most of the time she was leaning yes. Obviously, you have to do your diligence and all that, but she liked the asset class. But the IC was almost a default no, and that they wanted the DPI, given the lack of DPI. in the asset class. So you have this interesting, I guess, psychological element of it that goes above and beyond what is the expected value and what is the kind of the stone cold math on the

investment. Sometimes some LPs just want to have DPI. Right. And they want to deploy it into their next best investment also. They think they can get a two to three X on. So I can't blame them for that. Maybe you could tell me, why would a GP want to do a continuation vehicle on their asset? What's the incentives? They're looking at it and buying a company that they know really well. They already own it, but buying it in another pocket. So they know this company really well, so it's a de-risk investment for them to make.

And it's an investment where they've worked out the kinks, if you will. They've, you know, upgraded the management team, put the systems in place. And really importantly, they've developed the growth levers and executed on the growth levers. And they see continued white space to grow the company. So they know it really well. So why not invest in that company instead of, or in addition to, you know, another company that they're, you know, have 60 days to due diligence on, you know, has all the heavy lifting ahead of it. So it's a de-risk investment for them. And then the economics are really compelling.

So in the example I had before, they took their carry and rolled it into the new CV. So what did I say the carry was? $60 million, I think, in that example. So they have the opportunity for starters to take that $60 million in carry. And if they think on a de-risk basis, they can turn that into $120 to $180 million, you know, double or triple it. That's a great investment just there of their own capital. And then in addition to that, the CV has capital. We raised in my fictional CV, I think $480 million of capital.

400 of it was to buy the company, $80 million was to invest in growth post-closing. Some of that's going to be dead as well. But they manage that capital like a fund and they get carried interest on all that new capital. The one difference on the carry side, I just will mention, is that in your typical buyout fund, you know, they get a 20% carry, the GP, you know, after an 8 to 10% hurdle rate to the LPs. In the CV world, you know, we align interests a little better than that. We have a tiered carry. So your typical GP doesn't hit the 20% carry until we, agility and our investors, get at least two times our money back and at least a 20%. so you know it's better better aligned but you know that's a huge amount of extra carry that

they can get in addition to being able to triple their own invested capital so said another way the GP has done the work and which means provided a lot of the value add created these systems to obviously they have to continue working continue managing but a lot of these systems have been set up so they've done the value add and now they could essentially compound the returns from that value at. And two is there's a paradox investing is that the best diligence is to be an existing investor. So they've gone under the hood. They've been on the board. The portfolio CEOs are no longer in sales mode. They're actually in like operating and management mode. They've seen the data points from how they communicate, from how they grow,

how they execute. So they have more information on this current company than any possible, then could be done theoretically through any diligence process because by nature, diligence has a sales aspect to it, but they're on the inside. So it's dearest as well. Exactly. We talked about why it's attractive to GPs. Why are CVs so hot for LPs, and why are so many LPs piling into the CVs? So for the LPs that are sellers, that are investors in the KKR fund, it just gives them optionality so as we said early on there has been a dearth of distribution

since 2018 so for a long period of time so this gives them an opportunity to get liquidity you know through the through the CV but if they want to they can take the optionality of rolling their investment and you know getting a two to three X in a few more years So it gives them, it gives them optionality. Like we said earlier, most of them take cash from, and I think your question was also from LP, like our LP perspective, what's attractive about it. So from an LP's investing into an agility, the attraction is, you know, everything I mentioned before is we're getting an opportunity to invest in a de-risk investment.

Our whole periods are shorter because, you know, they've already, done the heavy lifting in the first few years of the investment. So typically we're looking at three to five years and we have a mechanism to actually, you know, force an exit if it, if it doesn't happen. And also there's this uncommon alignment that we have with the GP. We're not on the other side of the table where they're trying to, you know, paint the, well, I won't say it, but where they're trying to, you know, tell. Tell us, let's use the word frame narratives. There you go.

Where they're framing the narrative very positively relative to our questions and our diligence. You know, we're on the same side of the table, essentially, with the GP, because their buyers also. And, you know, we are tremendously aligned. So it's a really nice, de-risk, shorter-term investment opportunity for our LPs. So tell me about the HEC-PERS study on. continuation vehicles or CVs? Sure. Well, HEC has done the most comprehensive study that I've seen. It's HEC, the Paris School of Management. And they've collected data on 300 CVs. So it's a pretty large sample size. And

these are CVs that were created from 2018 to 2023. So the only problem is it's not a mature industry yet. So it's not a mature sample size. But they compare the CV returns against buyout returns. And what they found, the bottom line, is that CVs had a higher return than buyouts of similar vintage years. They had a higher DPI, so they were delivered cash back to investors more quickly than buyouts. And they had a lower dispersion of returns, so they were less risky than the buyouts. And then applying some real numbers to that, if I look at 2018, which is the oldest vintage they collected data on, you'll see that single asset CVs,

that's what we invest in in agility, had a total value of 2.4x. And 1.7X was actually returned in cash with about 700 basis points of remaining value. So 1.7 cash on cash return for the 2018 vintage with a 2.4 total value versus, buyouts in the same year that had a 1.8x total value, so 1.8 compared to 2.4, and they'd only return 0.8x. So most of their value was still in the portfolio and not translated into

cash. I should note that the stats I'm giving you are for the first portiles, so for the best funds, but you can see that it's really compelling. Is it apples to apples, or is it first quartile CVs versus first quartile P. It's apples to apples, first quartal to first quartel. And you could also make an argument, which I'm not sure if you're doing, which is not only do they perform better, but they're also de-risk, based on the factors that we said, which is the GPs know the management fee teams and they're more compounding than doing kind of these highly disruptive changes within the company.

Exactly. And I am making that argument, and HEC is backing up that argument with their data, which does show that there's a much narrower dispersion of returns in the CVs versus the buyouts, which implies it's less risky. So the CV asset class does not live in a bubble. It also is affected by specifically the returns of private equity, the lack of DPI and private equity, how does that lack of DPI play into the effects on the CV market? Does it affect the market in any way? Yeah, David, it's definitely expanding the market because it's viewed as another exit alternative in a market where it's difficult to exit companies. So, you know, last year, about 15% of exits were through CVs. And that's coming up from, you know, a decade ago, it was practically zero. It is viewed as an exit alternative.

But the only thing I'll add is that that's not the only reason that CVs are growing. CVs are also growing because, as we mentioned before, the GPs recognize it just as a great way to play forward, you know, their best assets. Set another way, if you know the asset, you know the risk, you know the management team, why would you sell that asset and buy an unknown asset to replace it? It kind of doesn't make sense on a first principle basis. Yep, I need to take you on my road show. Taking a step back, CV started on larger buyouts.

So tell me about how they started. I know you focus on lower middle market. So let's start with why CV started upmarket and how that's evolved over time. On how invest, we spend a lot of time talking about smart investments. And while most of those are financial, some of the best investments are the you make in yourself. That's why I'm a fan of Joe's jeans. Their new kinetic 2.0 denim looks rugged and timeless but feels nothing like stiff traditional denim. With modern four-way stretch, it's comfortable, resilient, and built with intention, so it moves with you wherever the day takes

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Your smart move starts here. Yeah, nearly everything, you know, at least in private equity, does start up market and then, you know, the trends, you know, continue. continue down market. So right now, for the largest 100 private equity funds, 50% of them have done at least one CV. Some of them have done multiple CVs, you know, out of different funds. And that is starting to bubble down, down market. You know, on the on the why down market, you know, why are we interested in the lower middle market? You know, it's like it's buyouts, in general, there's more return opportunity with the smaller companies versus the bigger companies.

So, you know, it's easier to double a company that has $10 to $15 million of EBITDA than a company that has $100 million of EBITDA. And you also get the impact of multiple accretion by growing smaller companies to kind of the next level of buyers, you know, versus the larger, larger deals where you don't have that opportunity. So there's a lot more alpha. There's a lot less competition, which is also part of that. You mentioned earlier that HEC's Paris study saw that CVs were less volatile. How is that measured?

And why do you believe CVs are less volatile than traditional bio? Well, HEC measures it by return dispersion. So they look at all the returns in their data set and, you know, the, you know, how far they, they disperse from the mean. You're asking me to do statistics, which I'm not great at, but. And, you know, there's a tighter dispersion with the CVs than there is with the buyouts, which, you know, indicates lower risk. And I forgot the second's part of the question. So essentially, you have the expected value, which is kind of the fitted line of return. and then you have the noise around that.

So if the standard deviation is much tighter on it, then that's how you measure risk. Exactly. Stayed and much better. You also invest in independent sponsor deals. So tell me about that market today. Yeah, yeah. So, you know, first of all, and I'm sure most of your listeners know, but, you know, an independent sponsor for those that don't know, you know, these are buyout professionals, but they raise capital. on a deal-by-deal basis instead of raising capital into a blind pool fund to invest later.

So it's a very large market. So there, unfortunately, is not much data on the market, you know, but they're said to be about 1,500 independent sponsors in North America. You know, our database at agility has about 1,000 of them, and it continues to grow all the time. and how much in deal volume is being done with independent sponsors it's not hard data but what what the the common theory is that there's actually more deals done by independent sponsors every year than they are from the dedicated buyout funds now these deals are a lot smaller but you know there's there's a lot of them and why are independent sponsors growing so quickly

Why is that market growing quickly? What are the confluence of factors? There's a bit of a supply demand going on here. So on the demand side, I'll start with, is that investors are recognizing that there is a better return profile in lower middle market deals than there is in kind of the mega buyout deals. You know, some go to the megabuy out because, you know, they've got managers that they are reliable and safe and there's a lower beta. but there is an increasing demand for lower middle market deal flow. And so they're going to independent sponsors because, as I said, there's tremendous deal flow there. And the investor, you know, gets the option to choose which deals they go into.

So the perception of the investor is, you know, that they're minimizing risk or reducing risk because they get to make the investment decision on, on each investment. on the supply side, there are more professionals that are joining the ranks of independent sponsors. And at least my theory is that since there has been a hard time raising funds over the past number of years, kind of corresponding with the lack of DPI to invest in funds, you've got kind of mid-level or mid-to- upper-level private equity folks that don't have. have a great path forward, you know, to partnership and wealth creation. So they're leaving private equity firms and they are becoming independent sponsors. And the typical path of an independent sponsor, is they want to do a few deals as an independent sponsor, raising capital on a deal by deal basis and then use that track record to raise a fund. I mean, it's similar to

agility. I left my prior institutional firm, you know, Fort Washington. And we've done, you know, know, eight deals, basically as an independent sponsor, we did have one small fund that we raised during that period. But basically as an independent sponsor, it's allowed us to do a few things. It's allowed us to build a track record. But importantly, it's also allowed us, you know, to build a team and become more institutional so that we can raise a fund, you know, rather than, you know, me going out with the PowerPoint with, you know, Paul Cohn, you know, trying to raise a fund on my own. And also it allows you to do deals versus marketing a hypothetical deal. So it allows you to actually get more reps as an independent organization.

So it's just more useful as a GP. Exactly. You've been doing this for 15 years now. What are some of the most non-obvious lessons they've learned? Yeah, on the CB side, where I see CVs developing, especially CB, single asset CVs and these mid-hold equity recaps is that they're just going to develop into the buyout market. So right now we've got secondary players that are putting them into their very diversified portfolios. We've got the market grew out of the secondary industry. So we've got people

that are used to, you know, evaluating portfolios not necessarily deals, although, you know, they're all quite good. But, you know, what I think is when you look back 10 years, from now, what you're going to see is, you know, the market's going to segment. And in the part of the industry that we focus on in the lower, lower middle market, single asset CVs, they're just going to look like buyout firms. I mean, that was the thesis for agility is that I wanted to build a team of buyout professionals, bring a buyout culture to the market that not only did buyout style diligence, but also was focused on value creation post investment. We have operating partners, you know, like a buyout fund. And our last deal that we closed, investment we closed,

we brought in an operating partner that was the COO of FedEx. And so he was a logistics guy. This is a logistics company. He's serving on the board for us, just like a buyout fund would bring somebody like that. And then finally, you're going to see the portfolio composition look like a buyout fund. So your typical buyout fund has a dozen plus or minus investments in it. They're fairly concentrated. Your typical secondary fund or the mindset of the secondary fund is to have large diversified portfolios to mitigate risk. We don't think you need to do that. We're mitigating risk with the alignment that we have with the GP with where we're entering the market partnering with these sponsors. Now, of course, we've got to do that.

due diligence to validate that we've mitigated that risk. But we can put together a portfolio of a dozen companies that are somewhat de-risk, you know, versus your traditional secondary portfolio. So we'll have, we have the luxury of building a concentrated portfolio where any one company can deliver an outsized return and move the needle versus your traditional secondary mindset, which is, you know, very large, diversified portfolio focused on, you know, mitigating any downside. So long answer, 10 years from now, I think, you know, these firms are just going to look like buyout firms accessing buyouts through partnering with sponsors. The only other thing that occurs to me as being non-obvious is that the asset quality that you have of these companies going through the CV market are the best assets of these. buyout firms or independent sponsors, they're not getting sold as they did in years past

upstream to the next largest private equity firm. So if you're an asset allocator, and I know you have a lot of asset allocators paying attention to your podcast, if you're an asset allocator, a lot of great companies are slipping through your opportunity set. If you're just investing in buyout funds to access great companies, you're going to need to think about how you want to play the CB market to capture the deal flow from these very high quality companies. From an allocator perspective, they're concerned about large buyouts is that, you know, a dying market or a market that's going to be very difficult to outperform even the SP 500 with illiquidity, which is just an inferior asset. But at the same time,

they do want to invest into private assets. So I think they look at it more like we need exposure into private equity. What is the best way to play that? You mentioned secondaries. You could go lower middle market. You could go into CVs. You could go into independent sponsor. So they're looking for what is the best player for this private equity position on a risk-adjusted basis. And they're having a tough time right now trying to figure out what we are. Yeah, the firms that focus on single asset CVs and we're not the only one, you know, where to bucket them, you know, is that a secondary? Is it a buyout? Is it somewhere in between? And we don't have an in-between bucket. You know, what I would say is, like I said, in 10 years from now, we're just another way to play buyouts. And the data is showing that our returns are just as compelling as buyouts. We're just accessing them through, you know, a different channel. GP stakes is a great example of this phenomenon because it's in some ways cash flowing because you get management fees from day one. It has like equity components because you're investing

into the underlying manager and sometimes you could invest into private credit manager so it has a private credit component. So it's still it's still an issue to the stay even though it's ballooned now to a 70 billion dollar market. You have this unique. vantage point in that for 15 years, you've seen hundreds of GPs on a yearly basis. I want to really unpacked the ethics of the top GPs. So you've seen them kind of start and you've seen how their careers have progressed on a scale of 1 to 100. Where are the GPs that have grown into the largest franchises? How do they fit from a 1 to 100 on an ethical standpoint? Are they the most ethical? Are they kind of like ethical with some pragmatism? So

are they not ethical? So how would you look at the ethics, which I would define as being aligned with their LPs and portfolio companies? But that seems like a question that's just going to generate a lot of hate in the industry. It's not meant to. I hate the word ethics. I like your definition, you know, maybe as far as alignment rather than ethics. Because, yeah, I wouldn't say I don't see unethical GPs, by and large, you can't survive in the industry for over a long period of time if you're unethical. But I will say, and I'll state the obvious here, is that, you know, GPs are motivated to manage assets. You know, the more assets that they manage, they get a management fee off of those assets, and that management fee can get, you know, very large, you know,

even if they're, you know, performance is, you know, just kind of a median performance and not top quartile performance. So there is a motivation to grow your asset base. And certainly we see that in spades, you know, at the top end of the private equity market. These firms are really just asset aggregators, you know, raising bigger and bigger funds, rolling out new strategies, you know, all the time. and investors stick with them because, you know, they're certainly, you know, very professional, very institutional, and they're fairly reliable, at least in being able to, you know, deliver median returns, you know, but, yeah, what you lose is the opportunity to get, you know, kind of those top tier returns. You may get it this fund or that fund, but, you know, I'd say, you know, down market, you know, the hungrier funds that aren't, you know, able to buy their house in the Hampton is just basically. on management fees or are working for carried interest you know you know that's that's still where the play is but i wouldn't use the word ethical i think they're all ethical and you know they all follow the rules but they're not necessarily all aligned with alpha seeking lps that's right there's this is something that i found is there's very few purely alpha lPs that are highly

focused on that as their North Star. Although, to be fair, a lot of the mandates are not to maximize alpha. It's to deliver a certain return with a certain level of risk. That's right. I mean, there is alpha and beta. And some allocators, and I can't argue with them, you know, are more focused on the blend, if you will. Maybe risk, maybe it's risk adjusted alpha. So, you know, investing in a large firm that gives them reliable median returns, you know, outweighs having to pick over the smaller managers where there's more beta, you know, so they've got to find. There's also essentially this self-dealing that comes in, that could come play in CVs where you underprice an asset. Do you see a lot of successful GPs doing this? Or is it the ones that

play nicely with all LPs and transparently are the ones that you've seen have grown into the biggest asset managers? Yeah, I mean, that's a great question. I mean, you're talking about there is a conflict of interest, you know, inherent in a CV because your buyer, in my example, KKR was selling the company out of one fund, buying it into the CV into this new fund of one asset. So there's a conflict of interest of having them on both sides of the table. So, you know, there's some regulators, yeah, for that conflict, and we see, you know, most everybody, you know, adheres to those regulators.

I mean, the first is your valuation policy, you know, at your firm. There is a need to mark your portfolio to a market valuation, you know, as measured with, you know, comparables and DCFs and all other things. So, you know, LPs should have some comfort that the portfolio is marked to market. And most CVs are done around the current value. So at that market value. Second regulator is that it's the gold standard in 99.9% of GPs hire an investment bank to run a process. So there's more than one buyer, you know, around the table. So it is a process, even if in our part of the market, it's not that competitive.

There's only a few of us. There is a process. We just can't steal a company colluding with the GP to only offer 80 cents on the dollar or something for it. So I think that the self-dealing part has really been mitigated because the market recognizes this conflict of interest. So if you could go back to 1985 when you finished your MBA program, I'm not trying to age you, but, and you could give one piece of timeless advice for Paul as he was graduating his MBA program, what would that timeless piece of advice be? First of all, I skipped one year of graduate school, or undergrad, and went straight in. So if you're doing the math, at least subtract a year from my age. You know, so what would I tell? This is a really, a really great question. You know, what would I tell young Paul?

Yeah, first of all, and I apologize to young Paul that I think that, you know, making mistakes is inherent in becoming a good investor. So, you know, I wouldn't want to tell young Paul all the mistakes I've made and I've made, you know, numerous mistakes because, you know, that's what really makes you a good investor. It's those scars that heal over. that make you a better investor, more than your successes would sometimes just come with, you know, luck of timing or, you know, execution by a management team that you're not involved with or something. A couple of things, though, I think I would tell young Paul is the first is just a bit of advice, and that's to trust your gut, especially when it comes to people. So, you know, you're going to come across people that are just not going to, you're going to set off alarm bells for you. I had a deal early in my career where I was told that the CEO was a diamond in the rough. That was a quote I remember.

It's like 30 years ago. I still remember the quote. I was co-investing with another firm on this. And the head of the other firm was like, this guy is just a genius, a great investor. He's a diamond in the rough. When I heard him, the CEO, I kind of walked out the meeting thinking, what did he say? We've all had meetings like that where you really have no idea what the guy said. And my alarm bells were going off.

But instead of listening to my gut, I listened to the other investor, who frankly was more senior than I, more reps and such, made the investment. Ultimately, you know, this guy turned out to be a really bad egg and did some bad things. And we had to replace them. a mentor of mine in investing at a great quote that I still use today saying there's no called strikes in investing. So if you see a pitch and you don't swing, no strike, even if it's a great investment later on, you know, don't look back. But if you swing and you and you and you whiff because you invest in a bad person or a bad company, you're stuck with that in your track record and your sleepless nights.

So, you know, trust your gut is the first thing that I would say. Because, you know, the people are the most important thing. And if an alarm bells go off, you know, don't invest in that person. And then the only, the second bit of advice I give is really along those lines is that if you need to make a change at a company, make it quickly. There's always the thought that it, you know, it's going to be disruptive and should I do it? Like, for instance, if a CEO is underperforming, you need to replace them, or you need to cut off a product line, or you need to cut costs, you know, all these really hard decisions, you know, they are disruptive. But if you rip off that Band-Aid, it's much better to do them quickly than to wait and to let things, you know, continue to slide in the wrong direction.

So those are two mistakes I guess I have made in my life that I would advise myself on. listen to your gut. I think there was a book on that, too. You're really good at this. Identifying this, you know, you can gauge people in like three seconds or something. I can't remember what the book was. Blank. Malcolm Gladwell? Yes, exactly. So that's my advice. When you have terminated people quickly, have you ever regretted that? I haven't. And actually, what I've had. is the other member, you probably had this too, other members of the management team say, it's about time. They generally are like, they're just relieved that you finally made, made that

call. They're not comfortable necessarily calling up and saying, get rid of my boss. That's a career-ending move. But usually they say, gosh, it's about time. Yeah, I've never had that happen either. I'm still looking for someone to disagree with that premise. but I think there's some kind of evolutionary purpose for not wanting to get rid of people. So by the time that you really need to get rid of somebody, I think it's almost always late. So you can never be too early. I think about these lessons, which are basically these learnable lessons and these unlearnable lessons. I think some lessons you have to experience yourself or we're just too stubborn to learn from others.

But the other ones is why I have the podcast, which I'm able to interview people like you, learn from your mistakes, kind of the learnable lessons part of it, which I probably say at least 80, 90%. And then hopefully have the wisdom to integrate lessons from somebody else without having to feel the painful lessons myself. But those 10 to 20% are irreducible and they must be made, which is why the smartest people in the world are not the richest. If you could learn and sit and listen to podcasts all day long and become great, people would do that. It's much better than making your own mistakes. But I think both are important. I think people fall in these kind of camps of doing versus learning. I think a healthy combination of both is the most optimal way to accelerate your growth.

But you're saying listening to why I invest is not a wealth creation exercise. Okay. It is necessary but not sufficient. This has been an absolute masterclass on continuation vehicles, independent sponsors, just how to think about creating structural alpha in the buyout space, which I think is missing today. What would you like our listeners to know about you, about agility, equity partners, or anything else you'd like to share? Well, you know, first of all, David, you know, thank you very much for asking me to participate.

Your podcasts are excellent. Agility we're trying to get across is, you know, that we're not. just buying tail end assets. We are here to provide, you know, equity capital for lower middle market buyouts of sponsor-led transactions. And we're not looking to do tail-end deals. We're actually looking to provide the fuel for, you know, companies to grow while they're in their real, their growth stage. These are high-quality companies. We've known each other for half a decade now and you're a finance nerd just like myself. Look forward to continuing the relationship and meeting live soon. Thanks for listening to My Conversation. If you enjoyed this episode,

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