Investing Billions - E378: Why LPs Keep Selling Their Highest-Quality Funds

Episode Date: May 28, 2026

What if the biggest opportunity in private equity today isn’t buying companies—but buying liquidity from investors who are forced to sell great assets for reasons unrelated to performance? In this episode, I sit down with Ryan Levitt, Co-Head of LP Secondaries at ICG, to discuss why secondaries have evolved into one of the most attractive areas in private markets. Ryan explains how LP secondaries can outperform traditional buyouts with lower downside risk, why DPI pressures are reshaping institutional portfolios, and how rules-based allocators create structural inefficiencies. We also explore return dispersion, continuation vehicles, GP relationships, and why access and information matter more than sourcing in modern secondaries investing.

Ryan, your co-head of LP secondaries at ICG, which has $127 billion in AUM. And last time we chatted it, you said that secondaries, in many cases, are better than primary investments for LPs. Yeah, if you look at the track record, going back, whether it's a five-year period or 20-year period, your secondary performance has outperformed traditional buyouts. And the interesting thing is, if you look at your worst-performers, so what is your worst-case outcome? Your worst-case outcome in buyouts, you lose money. And that wasn't the case 20 years ago. So buyout return dispersion has widened significantly. And so your first quartile buyout returns are quite good. Your second quartile are good enough. Your third and fourth quartile are pretty disappointing. If you look at secondaries, your fourth quartile secondary returns are making money and are massively outperforming buyout indices. So put it a different way. You're far better off in an average secondary fund than you are in anything but first quarter. buyouts. And we all know it's very, very hard on a blind pool basis to pick first quartile buyouts consistently. So taking a step back, why would you not prefer to say, I can pick an average

secondary fund, do almost as well as buyouts with far better liquidity and a far lower degree of risk from return dispersion standpoint? Professor Steve Kaplan and previous guys have this famous study on persistence. Persistence in venture capital is a try and truth thing over 40, 50 years, 52% of funds persist. And buyout, it's much more gray. It's not clear that there is persistence. For every great buyout manager, they have a bad fund or two. And it is hard to predict that in advance because it's not only the macro, it's also the micro. Do they have team turnover? Do they make a bad investment or two? Which way were interest rates going? If you invested in secondaries since the late 80s, early 90s,

you've outperformed on a consistent basis. Talk about persistence. Pretty much every other private market asset class. Maybe with the exception of top decile venture, and top decile venture is still going to be returns on paper, not cash in your pocket. I want to get back to that in a second. But you said something really interesting. You said that buyouts used to be much more banded, essentially downside protection. Everybody was getting 1x.

I've seen these studies. The amount of funds that historically had less than 1X is very small in buyout. But now that's changed. Why is that? You went from, pick a number, dozens of buyout managers in the 80s to hundreds to literally now thousands. It's just gotten to be more competitive. And for a while, financial engineering worked, then operational improvements. Now it's a combination of both.

It is just harder to generate returns in the buyout world. And don't get me wrong, we're delighted with some of the managers that we have invested with. But it is harder and harder to produce returns. And I think the fallacy of buyout expectations is, well, every buyout fund gives me a two to two and a half X and a 20% net return. In fact, very, very few funds actually produce those level of returns. Even taking a step back, this is one of my biggest pet peeves in all of investing is that asset classes in themselves are seen as either good or bad. And of course, it's supply and demand. The example I give on venture capital, a decade ago, you could get in the seed round at $5 million.

and sometimes today you're getting a $40-50 million valuation. It's technically the same asset class, but obviously a very different entry point. Same thing with buyouts. If you have 100 or 200 buyout managers and now you have another 2,000 biot managers, there's only so many deals. So what ends up happening? The ones that are disciplined that have enough deal flow, that have the brand, the same things that persist over time, they're able to say no to deals.

But those 2,000, funds, they still have to deploy capital. I don't see many biot managers returning capital. to deploy capital. Well, DPI or distributions relative to paid in as a challenge. And I think that's what LPs are grappling with today. Even if their buyout portfolios have performed quite well, they're not getting capital back. And so that is the challenge. Their results on paper are quite good. Again, taking a step back on private equity, buyouts as a whole have performed quite well for investors. You've outperformed public markets. You've done it with a lower degree of volatility. Do in part to the fact that marks are not daily or minute by minute. They're

quarterly. But you've done it on paper. And so capital back from buyout funds over the last five years post-COVID has been a real challenge, particularly over the last two or three years. And so institutional investors are grappling with the so-called denominator effect where private equity has outperformed to a degree where it's causing a problem from an allocation perspective. So endowments, foundations, institutions that are right, what I call rules-based allocators, where they allocate to private equity, they want it to be 15% of their portfolio. P.E. is outperform. Now it's 18% of their portfolio. What do they do? Distributions aren't coming back, so they go into the secondary market to go sell positions. So when you say secondary has outperform primary, do you mean on a moik basis,

on the IR basis? What's the basis for that? It depends on what time period you're looking at, five-year, 10, year, 15, 20, 25. But holistically, first quartile buyout, has done very, very well, but generic secondaries or a secondary market index has, by and large, performed on par with second quartile buyout, on an IRR, on a moik, and certainly on a DPI basis. Again, depends on your time period, but I think it's a broad statement that generally holds true. Your best-in-class secondary managers have performed on par with your first quartile buyout managers from a return standpoint, and have consistently done better on, a DPI standpoint. So you have to have the faith that you can consistently pick first

decile buyout managers before you can confidently say that you're going to outperform one of your better secondary managers. The number of secondary funds that have lost money, you can probably name them on one hand. And it's probably because they went into emerging markets or early stage assets. They overly concentrated in a particular investment. Your worst performing secondary funds generically are still returning about the pref for 8%. Expert calls have always been one of the most powerful ways to build conviction, but today, investors are asked to cover more companies, move faster, and do it with leaner teams. With Alpha Sense AI-led expert calls, their Tegis call service team sources experts based on your

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The first to see wins. The rest follow. Learn more at Alpha-sense.com slash how I invest. You mentioned this DPI crisis. I had the CEO of allocator training and student. They've tracked DPI for several decades. The original Swenson model accounted for roughly a 24% DPI on private assets. So you put in a million dollars, five, six years later, you should expect $240,000 per year.

2004 was 9%, 2025 looking like it's going to be 9% as well. So the organic DPI model is broken. Obviously, you're taking advantage of this on the other side and the secondary side. Give me a sense for the market. If I'm an LP and I'm looking to sell in the buyout space via secondaries, what kind of discounts are out there today? What you say at the beginning, 9% distributions relative to paid in capital. It's important to remember that's the market holistically. Your best-in-class buyout managers are delivering far better than that on a liquidity perspective. But again, if you're an institutional investor with a diversified portfolio, not everyone in your portfolio is a first quartile buyout manager. So you're grappling with slowing distributions holistically. You go to the secondary market.

market. And I would say discounts today range depending on asset quality from mid-high 80s into the 90s. And the fallacy of the secondary market was investors will sell their lower-quality assets. Actually, they're selling their higher-quality assets because no one wants to take a bigger discount. No one wants to go to their CIO, their board, and say, I'm selling assets at a 20% discount. They'd rather sell a better quality asset and say, I'm selling at a 8% discount, a 6, a 12, a 14. Lower quality assets garner a bigger discount, and no one likes the optics of that. It goes back to these principal agent problems we were talking about before we started recording. Absolutely.

Which is the average CIO is out of pension fund for 6.1 years, and they're trying to build their track record, and they're trying to get their next position. So it's better for them and for their career to let these bad assets stay at the previous mark and to sell these. these good assets. One of my favorite situations to be a buyer in is a CIO change. They're selling assets for reasons that have nothing to do with the portfolio. They're selling assets to free up capital to go make their own investments. There's a term I learned for this, putting my mark on the portfolio. Absolutely.

Which is also means taking away somebody else's mark literally on the portfolio and creating a new basis. There's also incentives there, which is oftentimes these CIOs are being incentivized based on literally their mark on their portfolio. So it makes sense to sell a bunch of assets, remark the book at a lower basis so that they could get their bonus. From my vantage point, as a secondary buyer, I can buy best in class assets from someone who will take a discount to intrinsic value. I don't have to bear the blind pool capital risk that they did when they made their initial investment. I can look at the dozen companies that are in a fund understand how well they're performing, what is the exit path look like.

I would do that all day long. and they're selling for reasons that have nothing to do with what's in the portfolio, oftentimes reasons that have everything to do with their particular organization, rules-based allocations, CIO change, their desire to re-up in the next fund, even though the prior fund's performing quite well. Again, you're selling assets for reasons that are not specific to the asset, which means it's a good time to be a buyer. And this blew my mind as I started to learn this,

but some governance is set up at very large institutions, $10, $20 billion, pulls of capital, that if you have 25% and buyout and one of your companies goes up and now you're 26%. You need a liquidity. You need to rebalance. That's exactly right. A lot of the governance has zero flexibility. You are dealing with a rules-based allocator that says, think about it, my portfolio is performing

exceptionally well. The value just went from 25 to 26%, but now I have to sell. Intrinsically, it doesn't make a lot of sense unless you're sitting in that organization, and your board has approved a set of rules that you allocate by, and you literally tripped almost a covenant for them to say, now I have to sell. From my perspective, I want to buy a high-quality asset that's outperforming, and I can typically buy it at a discount. You do that all day long. So you have the interesting challenge of investing $5 billion into secondaries. Where is the absolute best relative investment to make today?

We think it's in buyouts. So we don't do venture. We don't do growth. We don't do emerging markets. Our approach is by secondary positions in best in class buyout managers, largely in the U.S. or in Western Europe, where we have an embedded relationship advantage. So think about ICG as a global partner to private equity managers. We provide financing to their companies, senior debt, junior debt. We do continuation vehicles with them.

We make primary investments in their funds. We do co-investments with them. We do everything but compete with them. So oftentimes we're seen as an ideal replacement limited partner. And bear in mind that GPs have to approve secondary buyers. So we are looking for best in class buyout managers that we have an existing relationship with, that we can buy really good assets at a discount to intrinsic value, again, where the seller is putting those assets on the block for reasons that have everything to do with them

and oftentimes little to do with the actual assets. So you have seller-based reasons to sell and you have asset-based reasons to sell. Correct. And you're not in the business of trying to outsmart a current holder of the assets. you're in the business of providing liquidity. Perhaps this is a dumb question, but why do you like to buy assets from an existing relationship that you have? At the end of the day, sourcing is not our competitive advantage.

The secondary market, there's bankers, there's brokers, 90% of the secondary market is intermediated in some way, and your competitive advantage of buyer does not come from sourcing. It comes from information and access. So if we can pick the phone up to a GP, we are their largest mezzanine lender. We've done a primary investment in their fund, through our fund of funds, and we've looked to continuation vehicles with them, and we've looked at co-investments with them. We get a very warm reception picking up that phone and saying, hey, can we do an hour-long call with you, talk through your fund for portfolio, but there's someone that wants to sell it

and we'd like to buy it. That's a very different paradigm than you opening a family office and saying, I want to start doing secondaries, and the GP says, I don't know who you are. Why do I want to share with you proprietary information about my portfolio so you can buy the secondary? So is it the information that drives the alpha? Is it being approved as a buyer? Is it just knowing about processes that may not be intermediated?

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Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works. Check out is fast, receipts are instant, and sometimes I even get loyalty rewards automatically.

There's something about businesses that use Square. They just feel more put together. The experience is smoother for them, and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid.

Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to $200 off Square hardware when you sign up at Square.com slash go slash how I invest. The Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smartos, Square.

Get started today. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, managed staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this other day when I stopped by a local cafe here. They use Square and everything just works.

Check out is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them. and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in store, online, on your phone, or even at pop-ups,

and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square checking. They also have built-in tools like loyalty and marketing, so your best customers keep coming back. And right now, you can get up to $200 off Square hardware when you sign up at square.com

slash go slash how I invest. The Square, you get all the tools to run your business with none of the contracts nor complexity. Run your business smart or square. Get started today. It's all the above. I think the most important sources of Alpha is access and information. And of course, it's then picking the assets that you want to buy and saying no to the assets that you don't.

I know that sounds simplistic, but if you've bought the generic secondary market over the last 10 years, you've done pretty well. But there's, again, just like return dispersion in buyouts widened over the last 20, 30 years, there is return dispersion that's widening in secondary funds. In part, as more secondary funds are doing single asset continuation vehicles in individual companies. Return dispersion in what's called GP leads or CVs has widened as well. We do CVs. We have a great team that does CVs. But whether it's the GP side or the LP side of our secondary business, our mandate has never been to buy the GPs. generic market. It's by the best in class assets, even if it means paying a little bit more.

You keep on mentioning that there's return dispersion now and buyouts now in CVs. I have a thesis where if you take Occam's Razor, if you have a hot asset class like CVs, they just had $110 billion last year. That's a lot of money. And it's a lot of money if you just take away the incentive fee. In pure management fees, even though I know CVs have lower management fees and all these things, but it's a lot of money for bankers. It's a lot of of money for buyout managers. So what you're invariably going to have is people that chase short-term returns. And I would argue probably most people would love to chase those short-term returns. In a small elite group that are focused on long-term returns, you could call them

top-cortel investors. Obviously, it's more than just being long-term greedy to be a top-courtel investor. You need brand. You need the reps and all these things. But I think it's highly predictable that as an asset balloons, it's almost like a law of physics that the return dispersion will have to balloon because the incentives are so big for the short-termism. It's not an incentive thing. You have more new entrance into the secondary market, particularly on the GP side. New capital, new entrance, shorter track records. It's going to lead to a wider dispersion of returns. So even if they were well-intentioned, the skill isn't there. Not everyone can deliver first quartile returns. Not the way quartiles work. You're always

going to have first or fourth. Said another way, the only way that there wouldn't be large dispersion is if there was a completely efficient market between the people that raised money and the people that deployed money well. Absolutely. That there was no essentially fundraising skill. And because of the presence of the fundraising skill, there must be return dispersion because it's inefficient. Fundraising's inefficient. Access is inconsistent. Information is inconsistent. Investment judgment varies widely. All those reasons and more, I think, contribute to return. I know you didn't want to say it, but don't you think short-termism is an issue in finance in general and asset management? Yes, I think short-termism is a challenge in finance, much like every other industry. Are you making investments and building adorable investment business that's designed to last

decades, or are you trying to raise a really big fund, invest as much as possible quickly, and see how much carry you can get over the next two or three years? I think it's why track records matter. It's why team longevity matters. It's why every investor in private markets pays attention to track record of senior team, longevity of senior team, tenure of senior team. Historically, that's been your best predictor of success. So another way, there is short-termism, but it's also persistent as is long-termism.

In other words, it's not completely random. You don't wake up today and think, I'm going to be short-term today. And then on Wednesday, I'm going to be long-term. No. It's in your DNA. It's how you build a business. It's how you build a business. It's how you build an investment team.

The ironic thing in the secondary market is it's the same two dozen firms. that we're doing this in the 90s and the 2000s that are doing it today. There's clearly been new entrants, but the bulk of your capital is in the same two or three dozen firms. There's been two new entrants on the LP side. ICG is one of them. There's been a bunch of new entrants on the GP side, but relatively few of them have scaled significantly. And what are the second order effects of having these two dozen players essentially in the marketplace competing on deals year after year?

The ironic thing is, as big as the secondary market has gotten, there's not enough capital to support the market growth. So as much money of secondary funds have raised, they have not raised enough to support a market that has doubled every couple of years. What's the basis for that? Why do you believe that? If you look at dry powder relative to market opportunity, the secondary market, according to Evercore's latest report,

has about enough dry cap... The secondary market, according to Evercour's latest report, has enough dry powder to essentially absorb a little over one year of market supply. compare that to the buyout space, three, four, five years, depending on what time period you're looking at. There's a significant amount of secondary deals on the LP side and the GP side that simply don't get done. They get pulled from the market or they never make it to the market because bankers,

brokers, sellers don't believe there's enough buyer's capital to absorb it or there's enough interest in those particular assets. Give you one stat. The secondary market is still only about 2% of the prime. private equity market. The best analogy I have is it's the bond market pre-Bloomberg machine. If you held bonds pre-Bloomberg machine, you called the broker-dealer, you're not sure if you got a good price or a bad price, but there was no price transparency. And there are probably, you know, a handful of buyers in the early days. That market has exploded. Now, far more bonds

are traded on the secondary market than even on the primary market. Very few people hold bonds to maturity. This private equity secondary market is a fraction. of the primary market size. Most investors in private equity still hold all of their interests through final maturity. That is starting to change. It has been changing. It's contributing to the growth of the secondary market, but we're still very much in early innings.

So in another way, LPs are still clamoring for DPI. And as long as there's a course of LPs saying we want DPI, there's essentially four sellers on the GP side. And as long as there's still four sellers, there's going to be access capacity. In other words, if there was enough secondary buyers, there would be enough liquidity that GPs would give the liquidity and LPs would stop clamoring for it. I think that's directionally correct. I'll tweak it a little bit in the sense that the secondary market is not just driven by DPI needs. Secondary market moves in cycles.

So during the financial crisis, it was just liquidity driven. Largely financial institutions wanted liquidity. It drove the secondary market. Then active portfolio management of your private equity portfolio started becoming more commonplace, hence a CIO change that we talked about earlier. Then in the last couple of years, it's been a significant push on DPI, which has driven the growth of the LP market to its greatest levels ever, as well as driven the growth of continuation vehicles or the GP market. The secondary market has secular tailwinds that are driving its growth, and then in moments of time, post-COVID being one, DPI has pushed it along,

even faster. So I was ribbing you a little bit earlier about the ICG partnership model, but it's truly differentiated in the marketplace. One thing that is hard for me to understand is how you guys have grown to $127 billion while also staying good partners, given the friction there. How have you managed as an institution to overcome this friction between growth and partnership? I think it's a great question. I think part of it is we're not only partners to the GPs, we're partners to our investors. So we're stewards of our investors' capital, and each investor, various ICG funds knows that the investment teams are directly aligned with them. We invest alongside of them. We make money when they make money. We have no incentive to do deals just to do deals.

We don't get paid on deployment. We get paid on performance. And so I actually would usually define us as an investment firm, not necessarily an asset management firm, although obviously there is a lot of crossover. And if you look at some common threads in our partnership model, particularly in North America, our partners are best in class private equity sponsors, largely in the middle market. And we focus on high-quality assets. We focus on high-quality general partners. If I go back earlier in my career, one lesson that I learned early was that mediocre assets don't perform, no matter the price that you pay for them. You cannot get a big enough discount to offset the challenges of lower-quality assets or a lower-quality GP. So I'd say we

pick our partners carefully. We are stewards of our investors' capital. And every investment that we make, we're personally writing a check alongside of our investors. And we're motivated solely by investment performance, not just from an AUN perspective. I think many, if not most GPs, would love to grow to $100 billion plus in assets. Being on the inside and seeing ICG from the inside, is this just getting a little bit bigger every single day? Or are there's step functions where there's the market opportunity and the firm grows to the next stage. I think it's both. If you look historically at ICG, there's been a tremendous amount of organic growth,

but then we have also specifically added investment strategies that are complementary to the firm. So I joined seven years ago to co-head the LPS or limited partnership secondary business at ICG. That's a business that didn't exist before. I think ICG holistically looked at the market and said, we have the ecosystem, we have the access, we have the information to become an important player in this market. Let's go hire a team to go build that business. Let's support that business growth with our balance sheet, go out and

raise third-party capital, and build a market-leading specialist franchise on the LP secondary side. So it's been a combination of organic growth and then thoughtfully adding new strategies and new teams. Ryan, if you could go back to 2004 when you just graduated undergrad, What is one piece of timeless advice you'd get a younger, Ryan, that would have either accelerated your career or helped you avoid cosmic mistakes? Who you work for and who you work with is the most important decision you'll make. Tell me more. When we're hiring someone, I tell them who you work for, who you work with is arguably more important than what you do. And within reason, it's more important than what you get paid.

But all the factors have to work. A mentor at work, someone is going to teach you, someone you can learn from, peers that are as smart, if not smarter than you, are going to push you to greater success, are going to push you to develop more than you will just going for that first paycheck out of college. And I think I've tried to pick my career moves that way. Who are my peers? Who's my boss? What's the organization like?

And culture really matters. If you're an analyst, associate, VP, looking for your next role, how do you suss that out? How do you know ahead of time who's going to mentor you? I think it's a hard question. I think it's a reverse interview. When you're an analyst or an associate looking at you. to move jobs. Of course, we're going to interview you. We're going to ask you the hard questions. We're going to make sure your quantitative skills are up to par. I want to hear about your qualitative

skills as well. But it's incumbent upon you to ask us the questions. You should be asking us about culture. You should be asking us about lessons learned and managing a team. How do we think about your development? What's the career path look like? And then, of course, put your diligence hat on, go on LinkedIn, see who's worked at the firm previously, see how many connections you are away from someone who's working for us today and find out about the culture. I think the worst thing is arriving at a firm that you're really excited about. And the day that you walk in, you say to yourself, what did I do? But from a culture perspective, it wasn't a fit, no matter what the job description may say.

It's so interesting because a lot of the elite LPs will do two dozen references on a specific GP before they invest. But yet we'll not make five calls before they get in that seat. You would think you would at least do, if you did it on an equal basis, you would do 200, 300, references based on the magnitude of that. The other thing upstream of that is to go to an M&A adage, one buyer is no buyer. So if you have one offer, it's very difficult to reverse interviews. So set up the offer so that you have that flexibility to figure out where you would be the best fit.

Absolutely. Ryan, this has been an absolute masterclass. Thanks so much for jumping on. Looking forward to doing this again soon. Thank you very much.