Venture capitalists in Silicon Valley are hurrying to establish private equity-style structures in order to safeguard their portfolios and provide returns to investors. The VC funds which invest in start-up tech companies typically last 10 years, with the option of an additional two years. Their investors now want to see a profit. They have the power to make them sell or shut down the companies in their portfolio. The problem of providing those returns is that the funding boom for fledgling tech firms during the pandemic was followed by an unsteady economic climate, which has caused start-ups to stay private much longer.
According to those advising the plans, in response to this, dozens tech investors, including New Enterprise Associates, a $25bn venture capital firm, and Insight Partners, based in New York, have established or are setting up “continuation funds” vehicles.
Continuation Funds are commonly used in private equity rather than venture capital. They enable investors to transfer assets from old funds to a vehicle that they have control over. This allows them to “reset” the clock for several years. This allows the “limited partners” of a VC to either rollover their investment or exit.
Hans Swildens founded the venture capital company Industry Ventures. He said: “It’s a great time for this type of structure.” If the IPO market does not function, and M&A activity is low, then the only option for VC firms is to distribute funds to investors in the coming year. . . secondaries.”
Other funds are reorganizing their assets by selling a portion to new investors. This is done as the pressure to return money to limited partner’s increases.
If you haven’t been conservative with your reserves…” Every venture firm needs [liquidity]”, said the chief executive officer of a multi-billion dollar Silicon Valley company. It is a serious problem, the majority of funds are over 10 years old, and they have a few scraps that can’t be funded.
Goldman Sachs, Jefferies, StepStone Group, Industry Ventures, Coller Capital, and other large private investors have been in talks with venture groups regarding funding secondary transactions.
According to Jefferies, secondary funds raised $64bn in this year to purchase stakes in portfolio firms from venture and private equity companies. This is more than what was raised in 2021 or 2022.
Matt Wesley, head of private capital advice at Jefferies, said that many of the people they are talking to are in need of distributions.”Given that venture-backed companies have a dearth of exits, it is no surprise that the investment advisers who are registered are exploring continuation funds.”
In September, UK chip designer Arm and US grocery delivery app Instacart, as well as San Francisco-based Klaviyo , listed on New York exchanges, ending a 18-month-long drought in technology initial public offerings. Trading has been disappointing at all three companies. This led to start-ups delaying their plans for listing.
Joe Binder is a partner in Debevoise & Plimpton’s private funds group. He said that the performance of a few companies who have gone public had intensified conversations between venture firms. People had hoped that there would be more enthusiasm for tech listings, but this has waned. So people are looking at alternative solutions.
Continuation funds are not popular with limited partners because they have to choose between supporting a VC for a long time or selling their stake at a lower price.There are regulatory restrictions which make it hard for venture firms who are not registered investment advisors (RIAs), to create such vehicles.
According to a Jefferies letter advertising its venture client services, Insight’s continuation fund enabled it to transfer 32 companies out of its funds and into a new vehicle in a five week process. According to the letter, $1.3bn was distributed to Insight Partners’ limited partners as a result of this transaction.
Tiger Global, a company with over $50 billion in assets, hired Evercore as secondary investment advisers to assist in selling part of its venture portfolio.A strip sale was one of the options for this deal. According to sources close to the plan, the offers from buyers didn’t meet Tiger’s expectations and the transaction hasn’t been completed.
Quiet Capital raised $100 million in late 2021 from secondary investors through a “multiple asset tender offer” according to a document by Jefferies.
According to a source familiar with the transaction, the transaction allowed Quiet Capital LPs sell their entire or half stakes in the fund at a premium to Goldman Sachs Asset Management (secondary investors) and Blackstone Strategic Partners – both secondary investors.
In recent years, dozens of large venture capital funds like Sequoia Capital, Andreessen-Horowitz and General Catalyst became RIAs. This regulatory designation allowed them to trade in debt, cryptocurrencies and secondaries with other private investors.
Binder said that there used to be a clear distinction between a venture fund and a fund of private equity, but these strategies now converge. “Venture fund. . . “We are doing things that you would never have thought possible 10 years ago.”