Insight Partners is facing some headwinds for its 13th flagship fund, hearing rare pushback from one its larger LPs and reportedly cutting the fund’s target.
Last Friday, June 9, the Pennsylvania Public School Employees’ Retirement System’s board narrowly approved a commitment to Insight Partners XIII, with a dissenting voter expressing concerns about the manager’s performance and investment in failed cryptocurrency exchange FTX. PA SERS’s board voted 8-6 in favor of a $130 million commitment to the fund, a rare divided vote from a public investment board on an investment staff recommendation.
On Monday, the Financial Times reported that Insight would cut the target of Fund XIII from $20 billion to $15 billion. “In a letter to institutional investors on Monday, Insight Partners said that it was witnessing a ‘great reset in tech’ as a result of a steep decline in public company valuations that had impacted the value, number and quality of start-ups in which it could invest,” the FT reported.
The reported $20 billion figure may be a combination of the original targets for the flagship fund and a separate co-investment fund. Insight, which began raising both funds last August, did not disclose a target for either fund in SEC filings. Affiliate title Buyouts has reported that Fund XIII was targeting $17 billion, roughly the same size as Fund XII.
Insight, based in New York, is considered a bellwether for the venture industry. It ranked first on Venture Capital Journal‘s VCJ 50 ranking of the 50 largest venture fundraisers in 2021 and 2022, ahead of Tiger Global Management, Sequoia Capital and Andreessen Horowitz. Insight raised a total of $38.7 billion in the five-year period of 2017 to mid-2022, according to the VCJ 50 report.
The firm has raised just $2 billion so far for Fund XIII. In addition to PA SERS, investors in the fund include insurance company Cathay Life Insurance, which committed $80 million, and public pension Orange County Employees Retirement System, which committed $35 million, according to Venture Capital Journal research.
The investment from Pennsylvania almost didn’t come through. Pennsylvania Treasurer Stacy Garrity voted against the commitment, citing the performance of the system’s investments in Insight Partners vehicles from 2017, 2019 and 2021 as the primary reason for her opposition. During those years, PA SERS made commitments to Insight Partners X, XI, XII and a Fund XII buyout annex fund, documents show.
“Insight’s performance has been challenged,” Garrity said, stating that the system’s investments shifted from ranking in the first quartile to the third quartile based on their multiple of invested capital, a metric that typically measures cashflow generated from an investment.
According to a PA SERS investment memo, the system contributed $102.7 million to the 2018 vintage year Fund X, which has only resulted in $43.4 million in distributions as of September 30, 2022. PA SERS has contributed $145.9 million to 2019 vintage Fund XI, which has only returned $300,000 as of the same date.
However, these numbers do not reflect the valuation of assets these funds hold that have not been realized. These multiples look strong, with Fund X having a multiple of 2.4x and Fund XI having a 1.6x multiple.
According to data from CalPERS, another Insight Partners LP, Fund X is its strongest performing 2018 fund when incorporating unrealized valuations. Fund XI is also a top performer, CalPERS records show.
Garrity also pointed to Insight Partners’ investment in failed cryptocurrency brokerage FTX as a factor in her decision. “Their comments about FTX did not inspire confidence,” Garrity said.
A source familiar with discussions said Insight Partners, PA SERS investment staff and board members spent hours discussing the firm’s investment in FTX. “To say this was not adequately explained [by Insight] is surprising,” the source said.
FTX raised about $2 billion in venture capital from more than 80 investors before it filed for bankruptcy protection last November, and its founder was subsequently charged with fraud by federal prosecutors. Insight invested about $40 million through Series A, B and C rounds for the company, according to a report by The Information.
In recommending the investment in Fund XIII, PA SERS’ investment staff touted the firm’s experience in investing in software-as-a-service and related companies. “Insight’s success in executing its strategy begins with selecting the most attractive companies it identifies through its comprehensive coverage of the market and deep domain expertise,” staff wrote in their recommendation.
It took a few months for PA SERS to get comfortable with backing Insight’s latest fund. In December, a vote on a recommended commitment to Fund XIII was pulled from the investment committee’s agenda.
Investments from Fund XIII will be focused on North American companies with an enterprise value between $50 million and $2 billion, according to a note from PA SERS consultant Aksia. The vehicle plans to make at least 150 commitments with check sizes ranging between $15 million and $500 million, Aksia said.
PA SERS’ $130 million commitment will come in two parts, according to investment staff.
Of this total, $80 million would be a 2023 commitment to Fund XIII and possible sidecars. The remaining $50 million would require approval from the system’s asset implementation committee.
Insight Partners did not respond to a request to comment for this story. Spokespersons for board members Wendy Spicher, who serves as the acting interim secretary for the state’s Department of Banking and Securities, and State Senator Greg Rothman, directed requests for comment to PA SERS.
Lawrence Aragon contributed to this story