StepStone introduced final week that it had raised the largest-ever fund devoted to investing in dangerous secondary markets. This financing not solely totally displays Xingjian Capital’s danger secondary funding capabilities, but additionally displays the restricted companions’ views on the present danger market.
The fund, referred to as StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks an enormous step for the fund from its predecessor, which raised $2.6 billion in 2022, a report measurement on the time. , and was oversubscribed.
Secondary funds like StepStone purchase present investor stakes in two startups (referred to as direct secondary funds) in addition to restricted associate stakes in enterprise funds. The direct secondary market permits restricted companions to amass stakes in startups from already profitable firms which can be about to exit, which implies much less danger and shorter time to payback.
The report fund comes amid a pointy decline in enterprise funding. In keeping with PitchBook knowledge, enterprise funds raised $66.9 billion in 2023. That is down 61% from 2022, when funds closed at a report $172.8 billion.
Whereas detrimental general enterprise funding numbers may imply restricted companions are much less keen on investing in startups, Brian Borton, enterprise capital and progress fairness associate at StepStone, advised TechCrunch he would not suppose that is essentially true. He thinks restricted companions are nonetheless equally , however after the loopy valuations of 2020 and 2021, a lot of which have now evaporated, they’re in search of enterprise capital methods that may return outcomes sooner and with much less danger.
“Restricted associate curiosity in enterprise capital stays sturdy,” stated Bolton. “Numerous restricted companions are in search of broader or extra differentiated methods to construct publicity, and I believe secondary investing is unquestionably going to resonate as a option to construct publicity.”
He added that restricted companions are in search of methods to put money into venture-backed firms with out having to carry them for too lengthy a holding interval. Enterprise capital corporations, particularly people who make investments early, maintain investments the longest of any personal asset class.
“Numerous restricted companions have discovered a lesson, which is that you may’t time the enterprise capital market,” Bolton stated. “Institutional dedication to the asset class continues to be there, which is one thing we haven’t essentially seen in previous cycles. Restricted companions will not be falling by the wayside, they’re simply being extra selective about who they again and ensuring they’re doing issues the proper method.
This financing additionally exhibits the restricted companions’ occupied with the junior late-stage market. For worth causes, restricted companions could select to again secondary automobiles relatively than conventional late-stage or growth-stage centered funds. Median late-stage valuations have truly risen since their preliminary decline in 2022 when the market cooled, in accordance with PitchBook knowledge. In the meantime, many secondary offers are nonetheless buying and selling at reductions, in accordance with secondary deal monitoring platform Carta.
The fund’s closing, and the restricted associate curiosity it represents in later-stage startups and enterprise secondary markets, must be excellent news for enterprise capital corporations. Many enterprise capital corporations are in search of liquidity within the quiet exit market, and whereas buyers and startups wish to promote stakes, not each investor should purchase.
In keeping with SEC necessities, until they’re registered funding advisers, enterprise capital corporations can solely maintain as much as 20% of secondary fairness of their portfolios. Which means there aren’t many patrons for these secondary stakes exterior of devoted secondary funds, hedge funds and crossover buyers like Constancy and T. Rowe Worth.
Bolton stated $3.3 billion is definitely a small fund when you think about the potential measurement of the enterprise secondary market, which can proceed to develop as startups proceed to remain personal longer.
“We now have the biggest fund, however we strongly imagine that the fund continues to be small relative to the market alternative in entrance of us,” Bolton stated. “This enables us to be very selective in our picks and trades.”
Dangerous secondary market exercise has elevated this yr in comparison with final yr. Caplight co-founder and CEO Javier Avalos advised TechCrunch that the platform’s buying and selling quantity has reached $600 million to this point this yr, which is a 50% enhance from annual buying and selling quantity presently in 2023.
“It’s encouraging that the restoration in deal quantity comes from a rise within the variety of offers and a rise within the common deal measurement,” Avalos advised TechCrunch by way of e mail. “In Q2 2023, we noticed a mean of Secondary deal measurement was $1 million. We have seen closed deal sizes practically double this quarter, indicating that extra institutional investor patrons are lively available in the market as these funds usually take part greater than particular person buyers. Huge deal.
If restricted companions are more and more within the secondary marketplace for enterprise capital and deal quantity continues to extend, Bolton could also be proper. Though StepStone’s $3.3 billion fund is at the moment the biggest fund, there’s room for extra. There are lots of funds of the identical measurement or bigger. StepStone’s fund is probably not the biggest fund in the long run.
