The reset in tech valuations is well documented. Even after a recent rebound in public growth stocks, formerly highflying tech stocks are on average still down more than 50% from their 2021 peaks. And although private valuations have followed suit, particularly for later stage start-ups, the venture market’s real reckoning has yet to come.
Institutional LP’s, such as pension funds and endowments, are now overweight private assets given reduced public valuations amid more modest write-downs reflected in their respective venture fund investments. As a result, it’s not surprising that GP’s are being asked by LP’s to defer capital calls, making the true utility of venture ‘dry powder’ (or undrawn committed capital) unclear.
In this environment, VC fundraising for primary capital is becoming increasingly challenging, with LP’s shifting their focus from MOIC (multiple of invested capital) to DPI (distributions to paid in capital).
The good news is that certain venture funds are sitting on massive unrealized gains, even adjusting for the market correction, and there exist several solutions to unlocking LP liquidity.
Perhaps the most compelling of those solutions, GP-led continuation funds have allowed private equity funds to generate $60bn in liquidity in 2021, of which the vast majority went to LP’s. In a GP-led continuation fund transaction, a GP will transfer portfolio asset(s) to a new vehicle which is funded by new LP’s. Legacy LP’s from the pre-existing fund have the option to “roll” their respective fund interests into the new vehicle or cash out their pro rata share.
Within the private equity world, continuation vehicles are often the preferred alternative to the traditional paths to liquidity via IPO or M&A, particularly for prized assets, where value creation initiatives can best be achieved under the GP’s stewardship.
“Within leading VC funds, there are going to be some assets that may need to stay private for longer given the current state of the IPO market. For some of these portfolio companies, particularly “crown jewel” assets, the secondary market could play an important role in providing interim liquidity to existing limited partners”, said Gordon Appell, Managing Director at PJT Partners, on a recent Emerge9 podcast.
Mr. Appell went on to note that tech-related secondary transactions could face challenges with regards to wider bid-ask spreads given the current macro backdrop. Looking out to the medium term, Mr. Appell noted that as the secondary market matures, over time a growing set of investors will emerge that are seeking exposure to earlier stage assets.
Emerge9 is a technology platform facilitating access to private asset liquidity through various secondary solutions, including GP-led continuation funds. Our platform provides significant transparency into individual transaction processes and the broader asset class for investors who otherwise would be left out of this opportunity set. Importantly, the supply and demand aggregation of our tools benefit all stakeholder, from VC GPs and their LPs to smaller sophisticated investors.
