LPs’ Interest in Venture Secondaries Sparks StepStone’s Record Fundraise
StepStone, a prominent investment firm, recently announced the successful closing of its StepStone VC Secondaries Fund VI, raising an impressive $3.3 billion. This achievement not only demonstrates StepStone’s expertise in venture secondaries investing but also sheds light on the current sentiment among limited partners (LPs) in the venture market.
Venture secondaries funds like StepStone’s specialize in acquiring existing equity stakes from investors in both individual startups and venture funds. This approach provides LPs with access to stakes in successful companies that are nearing an exit, reducing risk and accelerating the potential for returns.
The timing of this record-setting fundraise is noteworthy considering the decline in venture fundraising overall. Data from PitchBook reveals that venture funds raised $66.9 billion in 2023, a 61% decrease from the previous year’s record-breaking $172.8 billion. However, Brian Borton, a VC and growth equity partner at StepStone, suggests that LPs’ interest in investing in startups remains strong. He believes that after the high valuations of 2020 and 2021, which have since diminished, LPs are now seeking faster and less risky venture strategies.
Borton explains, “A lot of LPs are looking for broader or more differentiated ways of building their venture exposure, and I think secondaries as a method of building that exposure certainly resonated.” He adds that LPs are also searching for opportunities to invest in venture-backed companies with shorter holding periods. Compared to other private asset classes, VCs tend to hold investments for the longest duration, making secondaries an attractive option for LPs seeking liquidity.
The preference for secondaries funds over traditional late-stage or growth-stage focused funds may also be influenced by pricing dynamics. While median late-stage valuations have rebounded since the market cooldown in 2022, many secondaries deals still trade at a discount. This insight, supported by data from secondaries deal tracking platform Carta, suggests that LPs see value in secondaries funds for their potential returns.
For venture firms, the potential for liquidity in a relatively dormant exit market is appealing. However, SEC requirements mandate that VCs can only hold up to 20% of their portfolio in secondary stakes. Consequently, the number of buyers for secondary stakes is limited to dedicated secondaries funds, hedge funds, and crossover investors like Fidelity and T.Rowe Price.
StepStone’s $3.3 billion fundraise may seem substantial, but Borton considers it relatively small compared to the expanding venture secondaries market. As startups increasingly choose to stay private for longer periods, the potential size of the market continues to grow. Borton remarks, “We have the largest fund, but we truly believe that is still undersized relative to the market opportunity in front of us.” This perspective suggests that there is room for more funds of similar or greater size in the future.
The growth of venture secondaries activity this year further supports LPs’ increasing interest in this space. Javier Avalos, CEO of Caplight, reports that transaction volume on their platform has already reached $600 million, a 50% increase compared to the same period in 2023. Notably, the average trade size has also doubled, indicating greater participation from institutional investor buyers.
Given LPs’ growing enthusiasm for venture secondaries and the upward trend in trading volume, Borton’s prediction that StepStone’s $3.3 billion fund may soon be surpassed seems plausible. The market appears poised to accommodate additional funds of similar or greater size as LPs seek out opportunities in the venture secondaries space.
