How GP stakes may provide a de-risked route into VC

How do you achieve scale as a large investor in venture capital funds? A platform launched this week aims to address this question.

Collective Global is seeking up to $1.2 billion for a GP stakes vehicle targeting VC firms. The firm was formed by Wafra senior adviser Daniel Adamson, who was previously president of Capital Constellation, and venture firm founder Sheel Tyle. It is also jointly owned by Orange County Employees Retirement System, the City of San Jose Retirement System and other LPs, as Venture Capital Journal previously reported.

Its debut fund will back 15-20 VC firms through direct equity ownership, debt investments and revenue shares.

The development is notable for several reasons, not least because the GP stakes community has thus far tended to invest across a broad range of strategies and asset classes rather than specializing in one area. Case in point: all of the 14 major GP stakes firms profiled by affiliate Private Equity International in April invest across at least two asset classes, with private equity often paired with the likes of private credit and/or real assets.

Also worth flagging is Collective Global’s ambitious return target: Fund I aims to deliver a gross multiple of invested capital of more than 3.2x and a net total value to paid-in ratio of more than 2.5x.

Fund I’s returns will be driven by commitments to the underlying fund, returns from its perpetual revenue share in the venture manager and the manager ownership terminal value. The strategy is, in essence, a venture fund of funds supercharged by additional returns from revenue shares and the ultimate sale of manager equity.

The opportunity feels compelling for LPs. Access to a VC manager’s carry, its GP commitment and the GP’s balance sheet will be the real alpha driver for LPs investing via a GP stakes strategy, says Thomas Liaudet, global head of GP capital advisory at Campbell Lutyens.

LPs will also find there isn’t much competition right now. Liaudet estimates that VC accounts for around 5-10 percent of GP stakes portfolios. Of the 14 major GP stakes firms, just a few focus on VC or growth managers, according to PEI research.

It won’t be all smooth sailing. Not all venture firms sell stakes in their management companies, and there is arguably less dealflow than in the wider GP stakes market. They do happen: VC is Petershill’s third most popular strategy, accounting for 9 percent of the 220 funds it has exposure to via its partner firms, behind real estate (19 percent) and buyouts (21 percent), per its 2022 annual report. Among the firms that have sold stakes to Petershill in the past five years are General Catalyst ($25 billion in AUM), Industry Ventures ($7 billion) and Thrive Capital ($16 billion), according to press reports.

The most recent stake sale we’re aware of happened in May 2022, when Sofinnova Partners ($2.65 billion) sold a minority stake to Apollo ($498 billion) as part of a deal that provided the Paris-based life sciences investor with up to €1 billion for future funds.

Collective Global’s strategy enables LPs to share in the upside generated by a highly diversified pool of VCs with less of the selection risk associated with committing to individual vehicles. It also – as OCERS chief investment officer Molly Murphy noted in the pension’s board meeting on Wednesday – solves the problem large LPs have in struggling to scale their VC portfolios.

“Venture capital is interesting because, as you grow larger in AUM and you want to write larger checks, you might price yourself out because venture capital funds are still small in size,” Murphy said. Collective Global gives OCERS diversification and the ability to scale up its check size, she added.

For what it’s worth, LPs do not seem to be treating Collective Global as a VC play. OCERS, for its part, has made the investment via its ‘unique strategies’ bucket, which represents opportunities “consistent with having low correlation and niche or unique investment characteristics with an attractive idiosyncratic risk/return profile,” a document from the pension notes.

Regardless of how these vehicles are categorized within a portfolio, Collective Global’s concept is an intriguing one that appears to tap a relatively underserved corner of the burgeoning GP stakes market.

Hannah Zhang, Adam Le and Lawrence Aragon contributed to this report

Note: This article was updated to reflect that Railpen is not a part-owner of Collective Global.