Aoifinn Devitt: This bonus series is kindly supported by Soundmark Partners. Soundmark Partners LLC is a women-owned and led private credit firm focused on commercial real estate.
Katie Stitch: Share the credit, shoulder the blame. I think that in our words, in our actions, we are modeling for our teams who they can trust, who will have their back, and we’re setting the tone for how they should present their work in an organization. Attitude informs experience. We would much rather have that person with innate intellectual curiosity who is going to be more excited about unpacking what makes a new company tick than they are bummed about the fact that there may be some weekend reading.
Aoifinn Devitt: In this podcast, we are going to dive into some of the detail and nuances behind private equity secondaries. These markets are deeper and more varied than ever before, with more than $100 billion in estimated volume in 2022 alone. For investors, this emerging marketplace provides an alternative to investing purely in primary fundraisers. The emerging field of GP-led secondaries, which now dominate volume in the field, presents unprecedented opportunities for continuation funds for GPs. And our guest reveals a surprising statistic around the prevalence of continuation vehicles. We will talk about discounting. In 2022, the average discount on secondaries was around 19%, the deepest average discount in more than 7 years. We’ll also talk about how GP-led secondaries differ fundamentally from LP-led secondaries. I hope you enjoy our conversation. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Katie Stitch, who’s a partner at W Capital Partners, a private equity firm based in the New York City area that provides secondary liquidity solutions to private company shareholders and to PE/VC investment firms. She’s held a number of board roles and started her career as an analyst in investment banking. Welcome, Katie. Thanks for joining me today.
Katie Stitch: Thanks for having me, Aoifinn.
Aoifinn Devitt: Let’s start with your background and career journey. Can you talk about where you grew up, what you studied, and how you came to enter the world of private equity investing?
Katie Stitch: Sure. I’m originally from Pennsylvania, and I studied at Penn both business and international studies. The guidance that I’d received from some upperclassmen had been that going into investment banking would be a great foundational skill set from which you could go into a variety of different careers in finance and investing. So I headed from undergrad to Bank of America’s investment bank in their energy M&A and capital markets group. I liked energy, but I wasn’t sure I wanted it to be the entirety of my career. So when I focused on buy-side roles, I was looking for private equity opportunities that had a more generalist bent. I’m dating myself, but this was 2005. And at that time, the strategy of many of the groups I was talking to sounded exactly the same. WCapital had been founded 4 years prior, and our founder’s thesis that private equity was growing and there would be shareholders that needed liquidity before the companies were to be sold or go public made a lot of sense to me. And it also wasn’t what anybody else was saying at the time, which to me spoke to an outsized return opportunity. It was a bit of a risk. WCapital at the time was smaller than any GP we covered out of my banking group, but it felt like a good time in my career to do so. And happily that risk has paid off. I’ve been with the firm for 18 years. And now serve as a partner focused on all aspects of our business.
Aoifinn Devitt: And it’s really interesting that the founder kind of spotted the disconnect maybe between time horizons of an underlying investment and the shareholders. What was going on maybe in the backdrop then that would’ve led to that disconnect and why were more people not seeing it?
Katie Stitch: So our three founders had very complimentary backgrounds. We had an ex-investment banker, an ex-restructuring advisor, and we had an ex-venture capitalist. And they, coming outta the tech bubble’s implosion, had seen a lot of people who were not traditional and long-term private equity investors come into the asset class. And when the tech bubble burst, a lot of these programs that were less committed, teams changed, people reallocated resources, and there was that need for liquidity. So they identified the fact that, you know, again, there will be long-term persistent growth in this industry, but there will also be people time to time that don’t see a deal or a company the same way. And there would be a great investment opportunity if you could step in as the bid.
Aoifinn Devitt: It’s really interesting. And before we move on to talk about the secondary landscape today, I always like to ask people about their majors because I think it really, first of all, inspires others with non-specific focuses, say finance, to enter our industry. International relations sounds intriguing. Was there any skill set from studying that that you think you now bring into your daily role in investing? Sure.
Katie Stitch: So I was actually lucky enough to be in a program at Penn called the Huntsman Program. It’s a dual degree program between a college and Wharton. That’s a college degree in international studies, and then a Wharton undergraduate business degree. And one of their big focuses is on the global role of business. You enter with proficiency in your target language, and then you exit with fluency. And that’s important to be able to, you know, leverage in whatever professional endeavors you apply that skill set to. My target language was Chinese, which people often don’t expect. But it was just, you know, such a powerful experience. I spent a semester of college at Tsinghua University in Beijing. And it’s always even though we’re mostly focused on the domestic US market, realizing the interconnectivity of our markets to those around the globe. I feel like it came to me from a really early age and is something that I’m deeply passionate about.
Aoifinn Devitt: And it’s interesting, I think also an appreciation for different stakeholders and their priorities, which of course now that you talk about secondaries clearly is, is really at the core of this value proposition is, is helping different stakeholders sort of reach an equilibrium with their priorities. So it’s an interesting link there. So let’s move on to talk about secondaries today, because I’d love to just describe this area a little bit in terms of the LP versus GP focus. Can you describe the work that W Capital Partners does and what it focuses on?
Katie Stitch: Sure. So first and foremost, we are solutions providers to private equity investors. We look for situations where a company is 2 to 4 years away from the optimal time to sell or go public, but there is a shareholder or shareholders who are looking for liquidity in advance. And then we have a number of different transaction constructs that we can use to accomplish this objective, each with different applicability. So for our deals, it’s about the underlying company and the shareholders’ needs. A step above that might be that same dynamic, but at a fund level with a limited partner’s needs really driving the transaction. Our energy has always been focused on the companies themselves and that direct investment underwrite, which we think is a really great history and sort skillset to bring to the evolution of the market, which we can talk a little bit about too. When you think about secondaries overall, trust is really important as our counterparties are often ongoing investors and they’re mindful about doing the right thing, not just for their funds and investors, but also for their partners. They want to make sure they’re transitioning ownership to a group that is going to be welcomed by the company’s management team and by their co-investor partners. I’ve been with W for 18 years and the growth in the industry has been incredible. Back in 2005 when I joined the firm, not only did we have to catalyze our deal opportunities, but you first almost had to evangelize and destigmatize the idea of a secondary. We’d often hear, know, you why would somebody sell? What will our partners think? GPs thought about secondaries and they thought about having to oblige an LP that was needing to transfer their interest. They didn’t think about it in the forefront of their minds in their own portfolio management, which is what’s happening today. 70% of middle market sponsors with funds up to $2 billion have now launched a GP-like continuation fund. So again, that evolution is astounding. GPs today are thinking about DPI for their investors and how to generate liquidity. And with the IPO and M&A markets pulling back, it’s an incredible time for this solution set to really emerge as a tactical and viable third path for some of their best companies. And you know, again, while some of the market drivers are exacerbated today, a lot of these drivers are going to be persistent across market cycles. There’s more assets in private markets, there’s more shareholders that hold them, and the exit environment overall hasn’t kept pace to satisfy the entirety of a fund’s liquidity needs inside the standard fund life. So we get really excited. The transaction logic for GPs is so compelling just in that GP-led example. You have a mechanism where a general partner can generate liquidity without shedding AUM. They also know the asset intimately as an owner. They fully appreciate the opportunities and the risks, and now they get to unlock the next phase of value creation as opposed to ceding that opportunity to a competitor. We don’t think it’s going to be every exit, but can you make the case that there’s the ingredients for a successful GP-led in a subset of every fund? Probably. So it’s a fun time to be in secondaries now after a long stretch where our deals were happening in the background, not given a lot of mindshare. You know, today they are at the forefront of top GPs’ thinking. And frankly, some of the best assets are being diverted to secondaries versus coming to market via the traditional change of control channels.
Aoifinn Devitt: Really interesting. So that’s the GP perspective. Actually, that’s a very surprisingly high number. That 70% number you cited Very interesting to see just how the world has evolved. To come to the LP perspective, we look at any investor, there’s always the buy discipline, the sell discipline. Often we see that selling is I mean, harder perhaps. If you were putting yourself with the LP’s kind of hat on, do you see that LPs are getting more comfortable exiting in either the GP-led arrangement or when we have the LP-led secondaries wanting to liquidate? Do you find that they’re more comfortable with that forum now as well? And then the LP entering, buying the proposition, what’s on their mind? What are they looking for essentially?
Katie Stitch: Both terrific questions. So what we have heard from LPs as a GP ourselves, and we’ve heard from our partners, is limited partners are very focused on GPs being thoughtful about liquidity and making sure that this is something that, you know, they give as much attention to as the new investment opportunities they’re deploying into. So if I were in your shoes and I had a GP who had a bunch of assets that were ready for a sale or were publicly traded and they had the ability to have liquidity and they didn’t take advantage of that opportunity in 2020 and 2021, I would have a lot of questions. So secondaries again can be a valuable tool to allow people to prudently take liquidity over time, recognizing that none of us are going to perfectly time the market. We have a number of deals we’ve executed with a terrific GP who has no issue raising capital and has been very successful. And programmatically, they decide every year, you know, we are going to look to achieve a certain percentage liquidity. If we have outcomes that we think are the right time for M&A or IPO paths, that’s great. But if not, let’s think about a secondary because this is what we believe is prudent as portfolio managers. So from an LP perspective, a lot of people think about secondaries as serving a role in a portfolio, particularly for new programs. You can use the secondary market to backfill some vintages that that you haven’t had exposure to and ensure that your J-curve is a little bit more mitigated by investing in a strategy that’s going to have a shorter duration and higher frequency of liquidity. All of those things are still true, but what I think is really exciting is now with more GPs embracing liquidity and GPs embracing continuation fund transactions, these are very attractive multiple of invested capital opportunities. So it’s not just about shorter duration and, you know, managing the J-curve. It is also absolutely going to be a catalyst to drive returns in a portfolio. So again, there’s a lot to be excited about.
Aoifinn Devitt: It’s really interesting. And in terms of then the, the old-fashioned, or maybe the, the original justification for secondaries might have been this J-curve mitigation, as you mentioned, more near-term cash flow profile, and of course diversification and access to some of those older vintages. Is the GP-led proposition any different from LP-led in that sense?
Katie Stitch: It is. So it, it’s going to be more concentrated in many cases. These can be single asset or multi-asset transactions, and it is also going to be something that’s going to have potentially a longer duration for the first liquidity event, but maybe not for the ultimate liquidity event. So if you were buying a portfolio of LP interest, you could see some liquidity almost immediately, but you might be waiting a long time for that ultimate liquidity, and there would be a long tail. Whereas a GP-led, certainly the W Capital targets, it still falls inside of our 2 to 4 year target duration. It’s an asset that’s been de-risked because you already have a sense to see how the management team and control GP partners work around the table. You can see how they’ve performed to date, and that can give you a lot more visibility and confidence into what they’re trying to do from here. And then you can still achieve a very attractive multiple on invested capital opportunity. Arguably, these deals are, are less efficient than a typical change of control sell side or public market process. So you can get into these deals at, in a de-risked framework, valuations that are sufficient to afford you a very attractive multiple on invested capital.
Aoifinn Devitt: We’re going to take a quick break to hear from our sponsor of this series, Sandmark Partners. I sat down with Jenna Gerstenlauer to talk about their private credit strategy. We talked about the sensitivity of real estate debt to rising rates.
Speaker C: For existing investments, whether debt or equity, when rates rise, the existing investment value declines. While real estate debt is highly correlated to interest rates, real estate equity is even more so given its first loss position in the capital stack. The debt piece can sustain some loss in the underlying value of the real estate as it is first absorbed by the equity owner. So as a lender in a higher rate environment, the opportunity to finance a property at a reset lower value presents itself. Lenders are able to provide a lower last dollar loan or lower risk loan, and now with rates high, at a higher rate. For new debt investments being originated in a high rate environment, this is a very compelling investment opportunity.
Aoifinn Devitt: And now back to the show. And I know that every investor is different in terms of percentages, but what would you say if you look at a private equity allocation, what percentage do you think secondaries will start to represent there?
Katie Stitch: I think it’s growing for sure, because again, to your point, the tactical motivation is still there, but now it’s going to be viewed as an ultimate return catalyst. And not only do I think the allocation is growing, but I think LPs are going to want to have more secondary exposure. It’s not going to be, here are 2 or 3 GPs that I can use to target the secondary market and some secondary market beta, if you will. It’s going to be, okay, here are some groups that will do diversified LP portfolios. Here are some groups that are going to do tail ends. Here are some groups who are doing directs. Here are some groups who are going to be thinking about infrastructure secondaries. Again, as the market is growing, I think it will take more and more mindshare as portfolios are constructed, as well as more capital.
Aoifinn Devitt: I’d like to now switch gears a little bit to talk about a backdrop to a lot of these podcast discussions, which is around diversity, the shape of the industry, the kind of complexion of the industry. And given your vantage point in the secondaries arena, you probably look at many, many underlying GP funds. What’s your impression of the diversity within the people behind these funds? How do you think the investment industry is looking? And this probably reflects also fundraising success of diverse founders. It would be reflected in the size of the funds you’re looking at. Any thoughts on that over the course of your time looking at the industry?
Katie Stitch: I’ll say a couple of things. You know, first, one of the things I often think about is whether there’s an inherent reason, especially going to an undergraduate business school, that our industry shouldn’t look like the makeup of the educational institutions that prepare individuals for this track. And while the industry has come a long way, we still have a lot of room to grow if that’s really the aspiration and the target. One of my favorite experiences, and this is, you know, dating back again to when I entered the field almost 20 years ago, we had an investment and one of our founding partners was really fighting hard for me to be one of our board representatives for that investment. I was incredibly grateful to him for doing so and for sponsoring me in that capacity. But at the time, I was the only woman on the board, and the chairman insisted on calling me a board assistant. And mind you, this was a kitchenware company. So every measure of stakeholder, women were hugely important to this business. So it’s just, again, to think about the mindshare. I, I can’t imagine that type of conversation taking place today. I think others before me cracked the door open, and then I, along with many of my contemporaries, felt it was then our responsibility to make ourselves indispensable and showcase the value of diversity of thought firsthand. And so now where we sit today, we’re lucky that the data’s actually there. You know, people recognize the value of having diverse perspectives represented. And now it’s not just anecdotes that we all, I’m sure, have countless of to share, you know, why that decision and conclusion should have been reached earlier. And the other thing I’d say is, you know, from a dealmaking perspective, you alluded to it with your question, there is a lot of trust inherent in our deals and having a foundational relationship with your partner, your referral source, your counterparty is so paramount. When you have different perspectives and personalities on a team, you have a better chance at finding someone in your organization that that contact is gonna spark with. And it may not be me, I may not be your cup of tea, but my partner so-and-so might be your brother from another mother and vice versa. So in terms of finding people you spark with, having a diverse team represented, you are going to be more effective at sourcing. No question. One of the sourcing channels that can be really effective in secondaries, there’s a number of different great organizations that have an affinity bent in secondaries, private equity, and institutional investing overall. And I often think about you that, know, getting back from a summit or a conference for women investors in secondaries or private equity, it would be such a pity if somebody didn’t have a team member that could slot in and take advantage of that networking opportunity. And I think a lot about recruiting as well. You know, the evolution of secondaries, as exciting as it is, is going to require really smart people and great teams that are going to continue to grow the market. And I think having a diverse team with diverse perspectives is going to be critical to that equation. People from diverse backgrounds. I think it’s an entirely different thing if you can say, here is our diverse team and they are all really excited to mentor you and help you grow into the professional that we see you in.
Aoifinn Devitt: It’s really interesting that you mentioned mentoring because I think it’s not just about the pipeline, it’s also about the progression through the system. And it does seem that the move— private equity is such a coveted role, usually, certainly was when I was at business school and hasn’t changed. And making that transition from the investment banking analyst or associate role into private equity, that leap can often be connections-driven, or that can be kind of elusive to many. How do you think that kind of mentoring, kind of mid-career piece is best enhanced for women or people who are generally underrepresented in this industry?
Katie Stitch: I think the mentorship is really important. So at W Capital, 30% of our investment team is women. And again, I think it’s really helpful when we are talking to those young candidates coming out of investment banking programs and thinking about which buy-side opportunity they want to take on to know, looking around the room, there are people who look like me who have been successful and have been able to make a long-term career here.. And some of the days are prettier than others, but at least to know that, you know, it’s an organization that is supportive of whatever an individual has on their plate is something that I think is very differentiated. I have seen groups that aren’t lucky enough to have senior female professionals on their team or have teams that are as diverse at the senior levels as the junior ranks they’re aspiring to also do a really good job of seeking outside mentorship. So making sure that people feel like even if they can’t see it in that organization, building bridges and connectivity across the industry. So that people have those people in their life to help guide them through what’s expected of you at different levels. Somebody once told me that what made you successful until you were a vice president is very different in private equity from what makes you successful from vice president onwards, just in terms of being that frontline of defense number cruncher to really being the representative of the firm, trying to persuade people to your way of thinking in a board meeting, trying to persuade somebody to work with you on a transaction or as a capital partner. And I think, again, giving people a lot of opportunity to get to know others that they can then borrow from to then optimize their potential is really important.
Aoifinn Devitt: That’s really interesting because I was just going to ask you about that when you mentioned it. What are the skills, I suppose, as you get to the senior level? And are there ways to retrain for that, or is the executive coaching provided to kind of fill in those gaps?
Katie Stitch: I think some of it’s seeing the inklings of those skills even at the earliest levels. So, you know, when we go through our associate recruiting process, We hire at the associate level out of investment banking. We as a firm don’t take the philosophy that we want people to work really, really hard for us for 2 years and then wash our hands of them. They’re on their way to do whatever they want to do next. We hire people that we see the potential to be strong vice presidents, strong principals, strong MDs, and beyond in the organization. So I think part of it is also just, you know, how you think about people. Are you as an organization preparing and architecting your processes around investing in people that if it’s a fit for them and a fit for you, you can see that future in. That’s very different than people who knowingly hire massive classes that they would never have the intention of promoting structurally. And in terms of where that mentorship is coming from, coaching or otherwise, I think there’s a lot of different pieces to that. You know, some of it can be specific aspects of a role, For example, hiring a speech coach and giving people early opportunities to present at annual meetings. And then some of it can be more longer term, you know, training and analysis to really make people effective at things that they don’t necessarily need to do in their current role, but they will in the future.
Aoifinn Devitt: Certainly my own experience of public speaking piece is never done. It’s always an ongoing, uh, process, humbling process of trial and error, but definitely, uh, a continuous learning. I’d love to just move to some personal reflections now. So looking back at your career so far, Any highs or lows in there that you can speak to?
Speaker C: Sure.
Katie Stitch: What I would say is that some of my high points have actually come out of some of my low points. And I think that the quote from Nelson Mandela really sums it up. You either win or you learn. And in our industry, some of those learning experiences can be really, really hard. It’s, you know, something not working the way you think it will. It’s somebody who you care about not being the right person for a role and a change needs to be made. A mistake that isn’t recoverable. So it’s hard, but there’s also so much growth that can come from that. And when you’ve lived through it, you understand why investors in diligence often ask you about something that didn’t go well. It’s not because they want to pick at a scab, it’s because they know in the future there will be things that don’t go according to plan, and they want to know that you’re the kind of team that’s lived through it and can apply those learnings to work through whatever’s around the corner in the future. And the high of fixing something that was thought to be broken and irrecoverable is incredible. I’d say personally, without going into the specifics, I am more proud of a situation where I helped recover 70 cents of our investor’s capital on investment than I am of striking a deal that earned us more than 5x return.
Aoifinn Devitt: It’s so interesting you mentioned that about those lessons learned questions, because I think absolutely it is a desire to get to the crux of a person’s staying power, resilience, learning from humility, and also it’s a really fine level of engagement. I think sometimes both the question asker and the person on the receiving end can take those questions in the wrong spirit, which is probably old-fashioned and, and needs to be banished, certainly that one. So what have you learned from any setbacks or challenges throughout the course of your career?
Katie Stitch: I’ve learned that it’s important to have balance, not necessarily in quantifying hours of the day, but also in what’s close to your heart. When something doesn’t go well for me professionally, the hugs I get from my husband and kids walking in the door at night are everything. And my outlook the next morning and my energy to take on that setback is vastly improved. And conversely, when one of my kids gets in a bungle, I know they are thankful that all of my mental energy and ire isn’t trained on them and parachuting into whatever issue it is that they’re facing. So I look at it a little bit like in investing, but having different pieces can actually have a smoothing effect. And sometimes the learnings are actually portable, as surprising as it sounds.
Aoifinn Devitt: That’s amazing. I love that. And you’ve spoken a lot about mentors. Have you had any particular mentors or significant people in your life that have made an impression on you for your career?
Katie Stitch: So one of my mentors actually encouraged me to think about mentorship less about one specific individual that is going to be your perfect fit and quite frankly may elude you, and more about an advisory board. And I’m really lucky because I do have an advisory board of, you know, people that brings diversity of thought and brings different perspectives that I can count on to consult in situations where I’m looking for guidance and feedback. And in this diverse perspective, there’s one individual I’m thinking of who is an incredible and generous person with those that he cares about, but he’s also unapologetically self-interested. And while I rarely take his advice at face value, there’s elements that can really challenge my thinking from time to time. So I do see the value in it. You’re not gonna get the same thing from every person, but that’s part of what can help you sort throughout in the mosaic of data points what the right path is for you.
Aoifinn Devitt: And you’ve already shared that wonderful piece of wisdom from Nelson Mandela. Any other words of wisdom, creeds, or motto that you have lived by to date or that someone has shared with you? Sure.
Katie Stitch: I have two. The first is share the credit, shoulder the blame, because I think that in our words, in our actions, we are modeling for our teams who they can trust, who will have their back, and we’re setting the tone for how they should present their work in an organization.. And you can model trying to sweep problems under the rug, or you can model pushing problems out into the open and presenting it as a challenge that can be solved together. So it’s something that, again, know, you as we think about, you know, our organization, that is absolutely something that we are incredibly transparent about, putting every piece of information on the table and making sure that that’s something that is widely understood. And I think at the, senior levels, we really have to set the tone with not just the I versus we per se, but when each is used. My second would be, I say this to my children regularly when they walk out the door, but it applies to everything we do. Attitude informs experience, and we actually hire for it here at W Capital. We would much rather have that person with innate intellectual curiosity who is going to be more excited about unpacking what makes a new company tick than they are bummed about the fact that there may be some weekend reading. So again, I, I hope it sinks in there. With kids, you’re never sure, but they hear it a lot.
Aoifinn Devitt: I love that. And I’ve actually written down your share the credit, shoulder the blame, because I think it really captures so much. I suppose my follow-up question to that is one that might particularly affect some women listening, is this was the concept of how important is it that that is universally practiced? Because I suppose the old game theory prisoner’s dilemma point comes in. Unless if everyone is not sharing the credit and you’re the only one who is, and everyone is not shouldering the blame and you’re the only one who is, there might be— you might be stuck. How important do you think it is to have that as a universal hallmark of culture?
Katie Stitch: It certainly is a more successful culture and a more positive culture if it’s shared universally. I will say I still subscribe to this philosophy even in diverse board settings where it isn’t universally adopted.. And my personal experience has been that people figure out what’s going on pretty quickly. And then even the densest person in the room who doesn’t necessarily espouse it hears enough from other people about the fact that, you know, again, it was a we, or they love the fact that somebody else says that. And slowly, slowly it can catch on. I love that.
Aoifinn Devitt: Well, I, I’ve written it down and I, I know that I hope it will be universally accepted where I work going forward. So thank you so much, Katie. For the first time I saw you on stage speaking so energetically. About the secondary market. I knew I wanted to have you here to capture some of that kind of at-the-coalface experience, as well as just the enthusiasm that you have for this space and private equity in general. So thank you so much for coming here and sharing your insights with us.
Katie Stitch: Thank you so much, Yifan. You know, seeing some of the people that you’ve talked to on this podcast, I’m flattered and humbled that, you know, this is a conversation that you wanted to have and very excited that you wanted to explore secondaries in more depth with this forum. And can I just say how personally impressed I am just with all you do and the many hats you wear, that this is yet another side hustle that you execute so capably. So it’s been a pleasure. Thanks so much. Thank you.
Aoifinn Devitt: Well, I’ll take this opportunity to share the credit on that, in that we, we do have a great team, but most of the credit goes to the generosity of the guests that give me their time. So thank you very much. I’m Aoifinn Devitt. Thank you for listening to the 50 Faces podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, Please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
Aoifinn Devitt: This bonus series is kindly supported by Soundmark Partners. Soundmark Partners LLC is a women-owned and led private credit firm focused on commercial real estate.
Katie Stitch: Share the credit, shoulder the blame. I think that in our words, in our actions, we are modeling for our teams who they can trust, who will have their back, and we’re setting the tone for how they should present their work in an organization. Attitude informs experience. We would much rather have that person with innate intellectual curiosity who is going to be more excited about unpacking what makes a new company tick than they are bummed about the fact that there may be some weekend reading.
Aoifinn Devitt: In this podcast, we are going to dive into some of the detail and nuances behind private equity secondaries. These markets are deeper and more varied than ever before, with more than $100 billion in estimated volume in 2022 alone. For investors, this emerging marketplace provides an alternative to investing purely in primary fundraisers. The emerging field of GP-led secondaries, which now dominate volume in the field, presents unprecedented opportunities for continuation funds for GPs. And our guest reveals a surprising statistic around the prevalence of continuation vehicles. We will talk about discounting. In 2022, the average discount on secondaries was around 19%, the deepest average discount in more than 7 years. We’ll also talk about how GP-led secondaries differ fundamentally from LP-led secondaries. I hope you enjoy our conversation. I’m Aoifinn Devitt, and welcome to the 50 Faces Podcast, a podcast committed to revealing the richness and diversity of the world of investment by focusing on its people and their stories. I’m joined today by Katie Stitch, who’s a partner at W Capital Partners, a private equity firm based in the New York City area that provides secondary liquidity solutions to private company shareholders and to PE/VC investment firms. She’s held a number of board roles and started her career as an analyst in investment banking. Welcome, Katie. Thanks for joining me today.
Katie Stitch: Thanks for having me, Aoifinn.
Aoifinn Devitt: Let’s start with your background and career journey. Can you talk about where you grew up, what you studied, and how you came to enter the world of private equity investing?
Katie Stitch: Sure. I’m originally from Pennsylvania, and I studied at Penn both business and international studies. The guidance that I’d received from some upperclassmen had been that going into investment banking would be a great foundational skill set from which you could go into a variety of different careers in finance and investing. So I headed from undergrad to Bank of America’s investment bank in their energy M&A and capital markets group. I liked energy, but I wasn’t sure I wanted it to be the entirety of my career. So when I focused on buy-side roles, I was looking for private equity opportunities that had a more generalist bent. I’m dating myself, but this was 2005. And at that time, the strategy of many of the groups I was talking to sounded exactly the same. WCapital had been founded 4 years prior, and our founder’s thesis that private equity was growing and there would be shareholders that needed liquidity before the companies were to be sold or go public made a lot of sense to me. And it also wasn’t what anybody else was saying at the time, which to me spoke to an outsized return opportunity. It was a bit of a risk. WCapital at the time was smaller than any GP we covered out of my banking group, but it felt like a good time in my career to do so. And happily that risk has paid off. I’ve been with the firm for 18 years. And now serve as a partner focused on all aspects of our business.
Aoifinn Devitt: And it’s really interesting that the founder kind of spotted the disconnect maybe between time horizons of an underlying investment and the shareholders. What was going on maybe in the backdrop then that would’ve led to that disconnect and why were more people not seeing it?
Katie Stitch: So our three founders had very complimentary backgrounds. We had an ex-investment banker, an ex-restructuring advisor, and we had an ex-venture capitalist. And they, coming outta the tech bubble’s implosion, had seen a lot of people who were not traditional and long-term private equity investors come into the asset class. And when the tech bubble burst, a lot of these programs that were less committed, teams changed, people reallocated resources, and there was that need for liquidity. So they identified the fact that, you know, again, there will be long-term persistent growth in this industry, but there will also be people time to time that don’t see a deal or a company the same way. And there would be a great investment opportunity if you could step in as the bid.
Aoifinn Devitt: It’s really interesting. And before we move on to talk about the secondary landscape today, I always like to ask people about their majors because I think it really, first of all, inspires others with non-specific focuses, say finance, to enter our industry. International relations sounds intriguing. Was there any skill set from studying that that you think you now bring into your daily role in investing? Sure.
Katie Stitch: So I was actually lucky enough to be in a program at Penn called the Huntsman Program. It’s a dual degree program between a college and Wharton. That’s a college degree in international studies, and then a Wharton undergraduate business degree. And one of their big focuses is on the global role of business. You enter with proficiency in your target language, and then you exit with fluency. And that’s important to be able to, you know, leverage in whatever professional endeavors you apply that skill set to. My target language was Chinese, which people often don’t expect. But it was just, you know, such a powerful experience. I spent a semester of college at Tsinghua University in Beijing. And it’s always even though we’re mostly focused on the domestic US market, realizing the interconnectivity of our markets to those around the globe. I feel like it came to me from a really early age and is something that I’m deeply passionate about.
Aoifinn Devitt: And it’s interesting, I think also an appreciation for different stakeholders and their priorities, which of course now that you talk about secondaries clearly is, is really at the core of this value proposition is, is helping different stakeholders sort of reach an equilibrium with their priorities. So it’s an interesting link there. So let’s move on to talk about secondaries today, because I’d love to just describe this area a little bit in terms of the LP versus GP focus. Can you describe the work that W Capital Partners does and what it focuses on?
Katie Stitch: Sure. So first and foremost, we are solutions providers to private equity investors. We look for situations where a company is 2 to 4 years away from the optimal time to sell or go public, but there is a shareholder or shareholders who are looking for liquidity in advance. And then we have a number of different transaction constructs that we can use to accomplish this objective, each with different applicability. So for our deals, it’s about the underlying company and the shareholders’ needs. A step above that might be that same dynamic, but at a fund level with a limited partner’s needs really driving the transaction. Our energy has always been focused on the companies themselves and that direct investment underwrite, which we think is a really great history and sort skillset to bring to the evolution of the market, which we can talk a little bit about too. When you think about secondaries overall, trust is really important as our counterparties are often ongoing investors and they’re mindful about doing the right thing, not just for their funds and investors, but also for their partners. They want to make sure they’re transitioning ownership to a group that is going to be welcomed by the company’s management team and by their co-investor partners. I’ve been with W for 18 years and the growth in the industry has been incredible. Back in 2005 when I joined the firm, not only did we have to catalyze our deal opportunities, but you first almost had to evangelize and destigmatize the idea of a secondary. We’d often hear, know, you why would somebody sell? What will our partners think? GPs thought about secondaries and they thought about having to oblige an LP that was needing to transfer their interest. They didn’t think about it in the forefront of their minds in their own portfolio management, which is what’s happening today. 70% of middle market sponsors with funds up to $2 billion have now launched a GP-like continuation fund. So again, that evolution is astounding. GPs today are thinking about DPI for their investors and how to generate liquidity. And with the IPO and M&A markets pulling back, it’s an incredible time for this solution set to really emerge as a tactical and viable third path for some of their best companies. And you know, again, while some of the market drivers are exacerbated today, a lot of these drivers are going to be persistent across market cycles. There’s more assets in private markets, there’s more shareholders that hold them, and the exit environment overall hasn’t kept pace to satisfy the entirety of a fund’s liquidity needs inside the standard fund life. So we get really excited. The transaction logic for GPs is so compelling just in that GP-led example. You have a mechanism where a general partner can generate liquidity without shedding AUM. They also know the asset intimately as an owner. They fully appreciate the opportunities and the risks, and now they get to unlock the next phase of value creation as opposed to ceding that opportunity to a competitor. We don’t think it’s going to be every exit, but can you make the case that there’s the ingredients for a successful GP-led in a subset of every fund? Probably. So it’s a fun time to be in secondaries now after a long stretch where our deals were happening in the background, not given a lot of mindshare. You know, today they are at the forefront of top GPs’ thinking. And frankly, some of the best assets are being diverted to secondaries versus coming to market via the traditional change of control channels.
Aoifinn Devitt: Really interesting. So that’s the GP perspective. Actually, that’s a very surprisingly high number. That 70% number you cited Very interesting to see just how the world has evolved. To come to the LP perspective, we look at any investor, there’s always the buy discipline, the sell discipline. Often we see that selling is I mean, harder perhaps. If you were putting yourself with the LP’s kind of hat on, do you see that LPs are getting more comfortable exiting in either the GP-led arrangement or when we have the LP-led secondaries wanting to liquidate? Do you find that they’re more comfortable with that forum now as well? And then the LP entering, buying the proposition, what’s on their mind? What are they looking for essentially?
Katie Stitch: Both terrific questions. So what we have heard from LPs as a GP ourselves, and we’ve heard from our partners, is limited partners are very focused on GPs being thoughtful about liquidity and making sure that this is something that, you know, they give as much attention to as the new investment opportunities they’re deploying into. So if I were in your shoes and I had a GP who had a bunch of assets that were ready for a sale or were publicly traded and they had the ability to have liquidity and they didn’t take advantage of that opportunity in 2020 and 2021, I would have a lot of questions. So secondaries again can be a valuable tool to allow people to prudently take liquidity over time, recognizing that none of us are going to perfectly time the market. We have a number of deals we’ve executed with a terrific GP who has no issue raising capital and has been very successful. And programmatically, they decide every year, you know, we are going to look to achieve a certain percentage liquidity. If we have outcomes that we think are the right time for M&A or IPO paths, that’s great. But if not, let’s think about a secondary because this is what we believe is prudent as portfolio managers. So from an LP perspective, a lot of people think about secondaries as serving a role in a portfolio, particularly for new programs. You can use the secondary market to backfill some vintages that that you haven’t had exposure to and ensure that your J-curve is a little bit more mitigated by investing in a strategy that’s going to have a shorter duration and higher frequency of liquidity. All of those things are still true, but what I think is really exciting is now with more GPs embracing liquidity and GPs embracing continuation fund transactions, these are very attractive multiple of invested capital opportunities. So it’s not just about shorter duration and, you know, managing the J-curve. It is also absolutely going to be a catalyst to drive returns in a portfolio. So again, there’s a lot to be excited about.
Aoifinn Devitt: It’s really interesting. And in terms of then the, the old-fashioned, or maybe the, the original justification for secondaries might have been this J-curve mitigation, as you mentioned, more near-term cash flow profile, and of course diversification and access to some of those older vintages. Is the GP-led proposition any different from LP-led in that sense?
Katie Stitch: It is. So it, it’s going to be more concentrated in many cases. These can be single asset or multi-asset transactions, and it is also going to be something that’s going to have potentially a longer duration for the first liquidity event, but maybe not for the ultimate liquidity event. So if you were buying a portfolio of LP interest, you could see some liquidity almost immediately, but you might be waiting a long time for that ultimate liquidity, and there would be a long tail. Whereas a GP-led, certainly the W Capital targets, it still falls inside of our 2 to 4 year target duration. It’s an asset that’s been de-risked because you already have a sense to see how the management team and control GP partners work around the table. You can see how they’ve performed to date, and that can give you a lot more visibility and confidence into what they’re trying to do from here. And then you can still achieve a very attractive multiple on invested capital opportunity. Arguably, these deals are, are less efficient than a typical change of control sell side or public market process. So you can get into these deals at, in a de-risked framework, valuations that are sufficient to afford you a very attractive multiple on invested capital.
Aoifinn Devitt: We’re going to take a quick break to hear from our sponsor of this series, Sandmark Partners. I sat down with Jenna Gerstenlauer to talk about their private credit strategy. We talked about the sensitivity of real estate debt to rising rates.
Speaker C: For existing investments, whether debt or equity, when rates rise, the existing investment value declines. While real estate debt is highly correlated to interest rates, real estate equity is even more so given its first loss position in the capital stack. The debt piece can sustain some loss in the underlying value of the real estate as it is first absorbed by the equity owner. So as a lender in a higher rate environment, the opportunity to finance a property at a reset lower value presents itself. Lenders are able to provide a lower last dollar loan or lower risk loan, and now with rates high, at a higher rate. For new debt investments being originated in a high rate environment, this is a very compelling investment opportunity.
Aoifinn Devitt: And now back to the show. And I know that every investor is different in terms of percentages, but what would you say if you look at a private equity allocation, what percentage do you think secondaries will start to represent there?
Katie Stitch: I think it’s growing for sure, because again, to your point, the tactical motivation is still there, but now it’s going to be viewed as an ultimate return catalyst. And not only do I think the allocation is growing, but I think LPs are going to want to have more secondary exposure. It’s not going to be, here are 2 or 3 GPs that I can use to target the secondary market and some secondary market beta, if you will. It’s going to be, okay, here are some groups that will do diversified LP portfolios. Here are some groups that are going to do tail ends. Here are some groups who are doing directs. Here are some groups who are going to be thinking about infrastructure secondaries. Again, as the market is growing, I think it will take more and more mindshare as portfolios are constructed, as well as more capital.
Aoifinn Devitt: I’d like to now switch gears a little bit to talk about a backdrop to a lot of these podcast discussions, which is around diversity, the shape of the industry, the kind of complexion of the industry. And given your vantage point in the secondaries arena, you probably look at many, many underlying GP funds. What’s your impression of the diversity within the people behind these funds? How do you think the investment industry is looking? And this probably reflects also fundraising success of diverse founders. It would be reflected in the size of the funds you’re looking at. Any thoughts on that over the course of your time looking at the industry?
Katie Stitch: I’ll say a couple of things. You know, first, one of the things I often think about is whether there’s an inherent reason, especially going to an undergraduate business school, that our industry shouldn’t look like the makeup of the educational institutions that prepare individuals for this track. And while the industry has come a long way, we still have a lot of room to grow if that’s really the aspiration and the target. One of my favorite experiences, and this is, you know, dating back again to when I entered the field almost 20 years ago, we had an investment and one of our founding partners was really fighting hard for me to be one of our board representatives for that investment. I was incredibly grateful to him for doing so and for sponsoring me in that capacity. But at the time, I was the only woman on the board, and the chairman insisted on calling me a board assistant. And mind you, this was a kitchenware company. So every measure of stakeholder, women were hugely important to this business. So it’s just, again, to think about the mindshare. I, I can’t imagine that type of conversation taking place today. I think others before me cracked the door open, and then I, along with many of my contemporaries, felt it was then our responsibility to make ourselves indispensable and showcase the value of diversity of thought firsthand. And so now where we sit today, we’re lucky that the data’s actually there. You know, people recognize the value of having diverse perspectives represented. And now it’s not just anecdotes that we all, I’m sure, have countless of to share, you know, why that decision and conclusion should have been reached earlier. And the other thing I’d say is, you know, from a dealmaking perspective, you alluded to it with your question, there is a lot of trust inherent in our deals and having a foundational relationship with your partner, your referral source, your counterparty is so paramount. When you have different perspectives and personalities on a team, you have a better chance at finding someone in your organization that that contact is gonna spark with. And it may not be me, I may not be your cup of tea, but my partner so-and-so might be your brother from another mother and vice versa. So in terms of finding people you spark with, having a diverse team represented, you are going to be more effective at sourcing. No question. One of the sourcing channels that can be really effective in secondaries, there’s a number of different great organizations that have an affinity bent in secondaries, private equity, and institutional investing overall. And I often think about you that, know, getting back from a summit or a conference for women investors in secondaries or private equity, it would be such a pity if somebody didn’t have a team member that could slot in and take advantage of that networking opportunity. And I think a lot about recruiting as well. You know, the evolution of secondaries, as exciting as it is, is going to require really smart people and great teams that are going to continue to grow the market. And I think having a diverse team with diverse perspectives is going to be critical to that equation. People from diverse backgrounds. I think it’s an entirely different thing if you can say, here is our diverse team and they are all really excited to mentor you and help you grow into the professional that we see you in.
Aoifinn Devitt: It’s really interesting that you mentioned mentoring because I think it’s not just about the pipeline, it’s also about the progression through the system. And it does seem that the move— private equity is such a coveted role, usually, certainly was when I was at business school and hasn’t changed. And making that transition from the investment banking analyst or associate role into private equity, that leap can often be connections-driven, or that can be kind of elusive to many. How do you think that kind of mentoring, kind of mid-career piece is best enhanced for women or people who are generally underrepresented in this industry?
Katie Stitch: I think the mentorship is really important. So at W Capital, 30% of our investment team is women. And again, I think it’s really helpful when we are talking to those young candidates coming out of investment banking programs and thinking about which buy-side opportunity they want to take on to know, looking around the room, there are people who look like me who have been successful and have been able to make a long-term career here.. And some of the days are prettier than others, but at least to know that, you know, it’s an organization that is supportive of whatever an individual has on their plate is something that I think is very differentiated. I have seen groups that aren’t lucky enough to have senior female professionals on their team or have teams that are as diverse at the senior levels as the junior ranks they’re aspiring to also do a really good job of seeking outside mentorship. So making sure that people feel like even if they can’t see it in that organization, building bridges and connectivity across the industry. So that people have those people in their life to help guide them through what’s expected of you at different levels. Somebody once told me that what made you successful until you were a vice president is very different in private equity from what makes you successful from vice president onwards, just in terms of being that frontline of defense number cruncher to really being the representative of the firm, trying to persuade people to your way of thinking in a board meeting, trying to persuade somebody to work with you on a transaction or as a capital partner. And I think, again, giving people a lot of opportunity to get to know others that they can then borrow from to then optimize their potential is really important.
Aoifinn Devitt: That’s really interesting because I was just going to ask you about that when you mentioned it. What are the skills, I suppose, as you get to the senior level? And are there ways to retrain for that, or is the executive coaching provided to kind of fill in those gaps?
Katie Stitch: I think some of it’s seeing the inklings of those skills even at the earliest levels. So, you know, when we go through our associate recruiting process, We hire at the associate level out of investment banking. We as a firm don’t take the philosophy that we want people to work really, really hard for us for 2 years and then wash our hands of them. They’re on their way to do whatever they want to do next. We hire people that we see the potential to be strong vice presidents, strong principals, strong MDs, and beyond in the organization. So I think part of it is also just, you know, how you think about people. Are you as an organization preparing and architecting your processes around investing in people that if it’s a fit for them and a fit for you, you can see that future in. That’s very different than people who knowingly hire massive classes that they would never have the intention of promoting structurally. And in terms of where that mentorship is coming from, coaching or otherwise, I think there’s a lot of different pieces to that. You know, some of it can be specific aspects of a role, For example, hiring a speech coach and giving people early opportunities to present at annual meetings. And then some of it can be more longer term, you know, training and analysis to really make people effective at things that they don’t necessarily need to do in their current role, but they will in the future.
Aoifinn Devitt: Certainly my own experience of public speaking piece is never done. It’s always an ongoing, uh, process, humbling process of trial and error, but definitely, uh, a continuous learning. I’d love to just move to some personal reflections now. So looking back at your career so far, Any highs or lows in there that you can speak to?
Speaker C: Sure.
Katie Stitch: What I would say is that some of my high points have actually come out of some of my low points. And I think that the quote from Nelson Mandela really sums it up. You either win or you learn. And in our industry, some of those learning experiences can be really, really hard. It’s, you know, something not working the way you think it will. It’s somebody who you care about not being the right person for a role and a change needs to be made. A mistake that isn’t recoverable. So it’s hard, but there’s also so much growth that can come from that. And when you’ve lived through it, you understand why investors in diligence often ask you about something that didn’t go well. It’s not because they want to pick at a scab, it’s because they know in the future there will be things that don’t go according to plan, and they want to know that you’re the kind of team that’s lived through it and can apply those learnings to work through whatever’s around the corner in the future. And the high of fixing something that was thought to be broken and irrecoverable is incredible. I’d say personally, without going into the specifics, I am more proud of a situation where I helped recover 70 cents of our investor’s capital on investment than I am of striking a deal that earned us more than 5x return.
Aoifinn Devitt: It’s so interesting you mentioned that about those lessons learned questions, because I think absolutely it is a desire to get to the crux of a person’s staying power, resilience, learning from humility, and also it’s a really fine level of engagement. I think sometimes both the question asker and the person on the receiving end can take those questions in the wrong spirit, which is probably old-fashioned and, and needs to be banished, certainly that one. So what have you learned from any setbacks or challenges throughout the course of your career?
Katie Stitch: I’ve learned that it’s important to have balance, not necessarily in quantifying hours of the day, but also in what’s close to your heart. When something doesn’t go well for me professionally, the hugs I get from my husband and kids walking in the door at night are everything. And my outlook the next morning and my energy to take on that setback is vastly improved. And conversely, when one of my kids gets in a bungle, I know they are thankful that all of my mental energy and ire isn’t trained on them and parachuting into whatever issue it is that they’re facing. So I look at it a little bit like in investing, but having different pieces can actually have a smoothing effect. And sometimes the learnings are actually portable, as surprising as it sounds.
Aoifinn Devitt: That’s amazing. I love that. And you’ve spoken a lot about mentors. Have you had any particular mentors or significant people in your life that have made an impression on you for your career?
Katie Stitch: So one of my mentors actually encouraged me to think about mentorship less about one specific individual that is going to be your perfect fit and quite frankly may elude you, and more about an advisory board. And I’m really lucky because I do have an advisory board of, you know, people that brings diversity of thought and brings different perspectives that I can count on to consult in situations where I’m looking for guidance and feedback. And in this diverse perspective, there’s one individual I’m thinking of who is an incredible and generous person with those that he cares about, but he’s also unapologetically self-interested. And while I rarely take his advice at face value, there’s elements that can really challenge my thinking from time to time. So I do see the value in it. You’re not gonna get the same thing from every person, but that’s part of what can help you sort throughout in the mosaic of data points what the right path is for you.
Aoifinn Devitt: And you’ve already shared that wonderful piece of wisdom from Nelson Mandela. Any other words of wisdom, creeds, or motto that you have lived by to date or that someone has shared with you? Sure.
Katie Stitch: I have two. The first is share the credit, shoulder the blame, because I think that in our words, in our actions, we are modeling for our teams who they can trust, who will have their back, and we’re setting the tone for how they should present their work in an organization.. And you can model trying to sweep problems under the rug, or you can model pushing problems out into the open and presenting it as a challenge that can be solved together. So it’s something that, again, know, you as we think about, you know, our organization, that is absolutely something that we are incredibly transparent about, putting every piece of information on the table and making sure that that’s something that is widely understood. And I think at the, senior levels, we really have to set the tone with not just the I versus we per se, but when each is used. My second would be, I say this to my children regularly when they walk out the door, but it applies to everything we do. Attitude informs experience, and we actually hire for it here at W Capital. We would much rather have that person with innate intellectual curiosity who is going to be more excited about unpacking what makes a new company tick than they are bummed about the fact that there may be some weekend reading. So again, I, I hope it sinks in there. With kids, you’re never sure, but they hear it a lot.
Aoifinn Devitt: I love that. And I’ve actually written down your share the credit, shoulder the blame, because I think it really captures so much. I suppose my follow-up question to that is one that might particularly affect some women listening, is this was the concept of how important is it that that is universally practiced? Because I suppose the old game theory prisoner’s dilemma point comes in. Unless if everyone is not sharing the credit and you’re the only one who is, and everyone is not shouldering the blame and you’re the only one who is, there might be— you might be stuck. How important do you think it is to have that as a universal hallmark of culture?
Katie Stitch: It certainly is a more successful culture and a more positive culture if it’s shared universally. I will say I still subscribe to this philosophy even in diverse board settings where it isn’t universally adopted.. And my personal experience has been that people figure out what’s going on pretty quickly. And then even the densest person in the room who doesn’t necessarily espouse it hears enough from other people about the fact that, you know, again, it was a we, or they love the fact that somebody else says that. And slowly, slowly it can catch on. I love that.
Aoifinn Devitt: Well, I, I’ve written it down and I, I know that I hope it will be universally accepted where I work going forward. So thank you so much, Katie. For the first time I saw you on stage speaking so energetically. About the secondary market. I knew I wanted to have you here to capture some of that kind of at-the-coalface experience, as well as just the enthusiasm that you have for this space and private equity in general. So thank you so much for coming here and sharing your insights with us.
Katie Stitch: Thank you so much, Yifan. You know, seeing some of the people that you’ve talked to on this podcast, I’m flattered and humbled that, you know, this is a conversation that you wanted to have and very excited that you wanted to explore secondaries in more depth with this forum. And can I just say how personally impressed I am just with all you do and the many hats you wear, that this is yet another side hustle that you execute so capably. So it’s been a pleasure. Thanks so much. Thank you.
Aoifinn Devitt: Well, I’ll take this opportunity to share the credit on that, in that we, we do have a great team, but most of the credit goes to the generosity of the guests that give me their time. So thank you very much. I’m Aoifinn Devitt. Thank you for listening to the 50 Faces podcast. If you liked what you heard and would like to tune in to hear more inspiring investors and their personal journeys, Please subscribe on Apple Podcasts or wherever you get your podcasts. This podcast is for informational purposes only and should not be construed as investment advice, and all views are personal and should not be attributed to the organizations and affiliations of the host or any guest.
