StepStone raised the most important fund devoted to investing in enterprise secondaries ever, the agency introduced final week. This fundraise doesn’t simply say rather a lot about StepStone’s enterprise secondaries investing prowess, but in addition about how LPs are fascinated by the present enterprise market.
The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a giant step up from the fund’s predecessor, which closed on $2.6 billion, a report dimension on the time, in 2022. Fund VI was raised from each current and new LPs and was oversubscribed, based on StepStone.
Secondaries funds like StepStone’s purchase current investor fairness stakes in each particular person startups, often called direct secondaries, and LP stakes in enterprise funds. Direct secondaries permits LPs entry to startup stakes in already profitable corporations nearing an exit which implies much less threat and fewer time to reward.
This record-setting fund comes at a time when enterprise fundraising is down sharply. In 2023, enterprise funds raised $66.9 billion, based on PitchBook knowledge. That marks a 61% lower from 2022 when funds closed on a record-breaking $172.8 billion.
Whereas the damaging total enterprise fundraising numbers might suggest that LPs are much less eager about investing in startups, Brian Borton, a VC and development fairness associate at StepStone, informed gajed he doesn’t assume that’s essentially true. He thinks LPs are nonetheless simply as , however after the wild valuations of 2020 and 2021, a lot of which have evaporated now, they’re in search of enterprise methods that return outcomes quicker and with much less threat.
“LPs’ curiosity stage in enterprise capital continues to be sturdy,” Borton stated. “Numerous LPs are in search of broader or extra differentiated methods of constructing their enterprise publicity and I believe secondaries as a technique of constructing that publicity definitely resonated.”
He added LPs are in search of methods to put money into venture-backed corporations with out as lengthy of a holding interval too. VCs, particularly people who make investments on the early levels, maintain investments the longest of any non-public asset class.
“Numerous LPs realized the lesson that you could’t time the enterprise capital market,” Borton stated. “There continues to be this institutional dedication to the asset class that we haven’t essentially seen in previous cycles. LPs aren’t chucking up the sponge, they’re simply being extra selective in who they’re backing and ensuring they’re doing it in the precise means.”
This fundraise additionally exhibits what LPs are fascinated by the first late-stage market too. LPs could also be selecting to again a secondaries automobile over a conventional late-stage or growth-stage centered fund due to value. Median late-stage valuations even have risen since their preliminary decline when the market cooled in 2022, based on PitchBook knowledge. In the meantime, many secondaries offers nonetheless commerce at a reduction, based on knowledge from secondaries deal monitoring platform Carta.
This fund shut, and what it says about LP curiosity in late-stage startups and enterprise secondaries, needs to be excellent news to VCs. Many VCs are in search of liquidity in a nonetheless quiet exit market and whereas traders and startups need to promote stakes not each investor is allowed to purchase.
Enterprise companies, except they’re registered funding advisors, can solely maintain as much as 20% of their portfolio in secondary stakes, per SEC necessities. Because of this there aren’t a ton of patrons for these secondary stakes exterior of devoted secondaries funds, hedge funds, and crossover traders like Constancy and T.Rowe Value.
Borton stated that $3.3 billion is definitely a small fund while you take a look at the potential dimension of the enterprise secondaries market which continues to develop as startups proceed to remain non-public for longer.
“Now we have the most important fund however we actually consider that’s nonetheless undersized relative to the market alternative in entrance of us,” Borton stated. “This enables to be very selective in what we select and transact on.”
Enterprise secondaries exercise is up this 12 months in comparison with final. Javier Avalos, the co-founder and CEO of Caplight, informed gajed that its platform has tracked $600 million of transaction quantity to this point this 12 months, which represents a 50% enhance over yearly exercise right now in 2023.
“What’s encouraging is that the pickup in quantity is coming from each a rise within the variety of trades closed and a rise within the common commerce dimension,” Avalos informed gajed over electronic mail. “In Q2 of 2023, the typical closed secondary commerce dimension we noticed was $1 million. We’ve seen virtually double the closed commerce dimension this quarter, indicating extra institutional investor patrons are lively available in the market, as these funds sometimes take part in bigger offers than particular person traders would.”
If LPs are more and more within the enterprise secondaries area, and buying and selling quantity continues to extend, Borton is likely to be proper that whereas StepStone’s $3.3 billion fund is the most important now, the market has room for extra funds of that dimension or higher. StepStone’s fund will not be the most important fund for lengthy.