LPs are piling into VC secondaries

Investors have largely slowed down or cut back on their commitments to primary VC and PE funds this year, but their appetite for secondaries remains strong.

Just this week, VC secondaries specialist Industry Ventures closed on $1.45 billion for Industry Ventures Secondary X, 70 percent more than it took for its previous fund, and firm founder Hans Swildens told Venture Capital Journal he saw enough demand to raise as much as $2.5 billion.

Fundraising also went much more quickly than Swildens expected. “Our fundraise went from thinking in Q4, ‘This is probably going to take a while’ to ‘We’re done.’”

Industry Ventures’ success story came just a week after StepStone Group made it official that it is fundraising for its sixth VC secondaries fund, filing a Form D with the SEC. The filing does not disclose a target for StepStone VC Secondaries Fund VI, but affiliate title Secondaries Investor reported that it is seeking $2.6 billion, the same amount it raised for its fifth VC secondaries vehicle. In yet another sign of strong demand, StepStone is coming back to market just 16 months after holding a final close on $2.6 billion for Fund V.

Yet another VC secondaries fund in market is Pinegrove Capital Partners, a joint venture between Brookfield Asset Management and Sequoia Heritage (Sequoia Capital’s wealth fund), which is reportedly targeting $2 billion. Pinegrove founding partner and CEO Brian Laibow, previously a managing director for Oaktree Capital Management, did not respond to a LinkedIn message asking about the progress of the fundraising.

Big bang

The overall secondaries market is getting a lot of attention from investors. Secondaries funds raised $37.2 billion in the first half of this year, up 29 percent from the first half of 2022, Secondaries Investor reported. At the same time, secondaries accounted for 12 percent of overall private equity fundraising during H1, up from just 5 percent a year earlier.

Those numbers are likely to go up. A survey released this week by Goldman Sachs Asset Management found secondaries to be the second most popular strategy for LPs, behind only co-investing, with 48 percent of LPs saying they plan to increase their allocations to secondaries.

“LPs remain most underallocated to strategies that offer differentiated access points to private markets, particularly secondaries, opportunistic, and infrastructure allocations,” Francis Idehen, US head of Alternative Multi-Strategy Solutions at GSAM, said in a report about the survey.

Michael Brandmeyer, co-head of GSAM’s External Investment Group, added: “Increased exposures by LPs to secondaries and co-investments, some building over a decade or more, are natural evolutions in private markets. Expanding numbers of sophisticated LPs now have the resources and expertise to access these strategies as part of their core allocations.”

The report also noted that more LPs are considering investing in secondaries funds as opposed to selling assets on the secondaries market. “While most GPs continue to see full exits via asset sales as the most likely path to liquidity in the year ahead, many LPs are content to endure slower exits, rather than seek secondaries market relief,” GSAM said. “Instead of selling (10%), more LPs are engaging as secondaries fund investors (45%). This may change should discounts narrow and LPs opt to trim their portfolios in the coming year.”

For venture capital secondaries in particular, LPs are slowly coming to appreciate the size of the opportunity. Swildens of Industry Ventures estimated H1 volume to be about $35 billion and predicted total volume for the year would be around $80 billion, including the sale of VC portfolios and shares in venture-backed companies. “Most folks don’t understand how large the [VC secondaries] market is,” he said. “At least 50-70 percent of all the venture funds in the US have LPs that are selling because they need some liquidity.”

Even top-tier VC funds are being shopped. For example, failed crypto exchange FTX held a stake in a Sequoia Capital fund that was sold on the secondaries market, Swildens said.

He attributes the growth of the market in large part to buyers and sellers feeling more confident about the price of assets. “There’s enough trading going on and enough valuations being done by buyers, companies, funds and M&A and IPO bankers that there is [a growing consensus that] a fair value is being set,” Swildens said.

“Fifteen years ago you didn’t have any of this valuation stuff. It was kind of the wild west. Now there are data points you can look at in every transaction to make you feel comfortable with ‘what is market’ for whatever asset you’re buying.”

Swildens said dealmaking has started to pick up now that potential sellers understand that they likely overpaid for assets a couple of years ago. “It has taken about a year for the bid/ask spread to be accepted,” he said, noting that recent IPOs of tech companies such as Instacart have helped sellers accept that what they thought were “unfair prices” were actually reasonable.