E249: How LPs Unlock Liquidity Without Selling
Timestamps are as accurate as they can be but may be slightly off. We encourage you to listen to the full context.
Podcast Summary
In this episode, Alex Simpson, Co-founder of Liquid LP, discusses how his platform provides NAV loans backed by LP and GP interests in private funds. (00:08) The conversation explores how these loans work, how lenders underwrite illiquid portfolios, and when borrowing may be preferable to selling in the secondary market. (00:44) Simpson explains how different types of investors use these loans for personal liquidity, capital calls, tax needs, and portfolio rebalancing, with loan structures ranging from $1 million to $75 million at LTV ratios of 20-40%. (21:01)
- Core themes include NAV lending as an alternative to secondary sales, the growing demand for liquidity solutions in private markets, and how different investor types utilize these financial tools for various strategic purposes.
Speakers
Alex Simpson
Alex Simpson is the Co-founder of Liquid LP, a platform providing NAV loans backed by LP and GP interests in private funds. He has an entrepreneurial background, having started multiple companies in South Africa and Australia with mixed success. Simpson's experience spans the venture capital and fund business space, and he originally founded his current company to focus on lending against pre-IPO shares before pivoting to the LP segment based on market demand and product-market fit.
Key Takeaways
Understand When NAV Loans Trump Secondary Sales
NAV loans allow investors to access liquidity while retaining ownership and future upside potential, unlike secondary sales which are permanent exits at discounts. (00:44) Simpson explains that this is "particularly attractive when someone has conviction on the underlying assets, but simply needs the liquidity for personal other business uses." (00:55) The key insight is that NAV loans provide optionality - you can access capital without sacrificing long-term investment returns. For professionals managing illiquid investments, this creates a strategic advantage by maintaining exposure to high-conviction positions while addressing immediate liquidity needs.
Diversification and Fund Quality Drive Pricing
Interest rates on NAV loans typically range from high single digits to low-to-mid teens, with pricing heavily dependent on the underlying collateral quality. (01:59) Blue-chip funds command lower rates while venture-type assets fall on the higher end of the range. Simpson emphasizes they "look at diversification, the maturity of the fund" when determining rates. (02:04) This teaches professionals that building a diversified portfolio of high-quality fund investments not only reduces risk but also improves access to favorable financing terms when liquidity needs arise.
Speed and Flexibility Create Competitive Advantage
Liquid LP differentiates itself from major banks through bespoke service and faster execution times. (03:18) While banks focus on their existing clients and platform funds, Simpson's firm can complete loans in as little as two weeks for straightforward cases. (16:28) The lesson for professionals is that in financial services, specialized focus often beats comprehensive offerings. By concentrating on lending relationships rather than trying to provide wealth management services, they deliver superior speed and customization in their core competency.
Purpose of Use Significantly Impacts Risk Assessment
The intended use of loan proceeds heavily influences both approval and terms, with business investments viewed more favorably than personal uses. (15:02) Simpson notes they prefer funding for "capital calls because then we know where the liquidity is being driven to from an asset allocation perspective." (15:10) This insight reveals that lenders view business-related borrowing as lower risk because they can track and evaluate the flow of funds. Professionals seeking financing should frame their capital needs in terms of strategic business objectives rather than personal consumption to secure better terms.
Advisory Boards Require Strategic Timing and Expectation Management
Building an effective advisory board requires careful timing and clear expectation setting with high-profile advisors. (24:01) Simpson learned from previous ventures that bringing on big names too early can be counterproductive because "they physically can't do much in the beginning because they're at a certain level where their impact is really more effective at their level." (24:11) The key is meeting advisors where they are in their careers and aligning their natural motivations with company needs, whether that's commercial success, personal impact, or mentoring opportunities.
Statistics & Facts
- NAV loans typically range from 20% to 40% loan-to-value ratios depending on underlying collateral quality and use of funds. (04:24) Simpson explains this range accommodates different risk profiles and interest rate preferences, with the standardized model allowing for bespoke adjustments on a client-by-client basis.
- Interest rates for NAV loans fall in the high single digits to low-to-mid teens range, with blue-chip funds securing lower rates and venture assets commanding higher rates. (01:59) This pricing structure reflects both the illiquidity of assets and the flexibility provided to borrowers.
- Loan amounts range from $1 million up to $75 million, with an average loan term of approximately 24 months. (21:01) The platform can accommodate loans between one to four years with refinancing options based on client needs, demonstrating the scalability of their lending model.
