Friday Letter: LP interest in venture is growing

Different Funds reports that VC funds today have more LPs in a given investment vehicle than ever before.

Life is far from how it used to be 18-plus months ago. Virtual meetings between GPs and LPs take precedence over in-person get togethers. And travel is way down, too. I hear from investors who say it may stay this way for a while.

Not to worry, though. Because if there is one thing that is constant it’s LPs investing in funds. Whether it’s new relationships or re-ups, fundraising is robust. In fact, there’s a great deal of LP interest in venture firms these days, an observation that GPs and LPs often express to me.

The advisory service Different Funds earlier this month issued a report that says venture funds are seeing a surge in LP participation. You can check out their research here.

It should surprise no one that it’s the mega-funds that are seeing the most growth in LP participation. Between 2016 and 2021, Different Funds found that the average number of LPs participating in a mega fundraise doubled from about 90 to more than 180, with no sign of a dip amid the pandemic in 2020.

The story line in the past year has been that emerging managers are suffering the most, as LPs are reluctant to invest in a fund manager they can’t meet in person unless they have a prior relationship.

But Different Funds found it’s not just mega-funds enjoying a lot of LP interest. Reportedly, sub-$25 million funds have also nearly doubled their average number of LPs per raise, from about 25 in 2016 to almost 50 so far in 2021.

Overall, in the past five years, the average number of LPs for Funds IV and later rose 144 percent, compared to 7 percent for debut funds, Different Funds reports.

“It appears, then, that there’s growing interest in venture from accredited investors with a wide range of capital resources and a wide range of fund size preferences,” Different Funds reported.

This could be explained with various factors, such as the growth of family offices and high-net-worth individuals in GP funds. And since their amount committed is lower than say a pension, more are required to help fill out a fund.

Whatever the reason, Different Funds reports that the growth of LP is promising for the many venture firms raising funds in the sub-$100 million range. In the past 18 months, these firms anecdotally have said that they are generally unable to close their first-time vehicles. The reasons vary from lack of access to large institutional investors to covid-impacted restrictions on in-person meetings.

However, 2021 has so far seen a return of growth in LP participation across the board for all venture partnerships, according to Different Funds.

Different Funds provides other interesting data sets, including how new LP entrants to venture are preferring the two largest markets over emerging ecosystems, which goes against the notion that LP are becoming more open to non-traditional regions.

The question remains, however, whether the robust activity will continue or will LPs pull back, as many predicted at the onset of the pandemic last year?

Let me know what you think. You can hit me up at agoldfisher@buyoutsinsider.com.