StepStone raised the most important fund devoted to investing in enterprise secondaries ever, the agency introduced final week. This fundraise doesn’t simply say lots about StepStone’s enterprise secondaries investing prowess, but additionally about how LPs are eager about 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 document dimension on the time, in 2022. Fund VI was raised from each present and new LPs and was oversubscribed, in keeping with StepStone.
Secondaries funds like StepStone’s purchase present 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 firms nearing an exit which suggests 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, in keeping with PitchBook knowledge. That marks a 61% lower from 2022 when funds closed on a record-breaking $172.8 billion.
Whereas the detrimental general enterprise fundraising numbers could indicate that LPs are much less excited about investing in startups, Brian Borton, a VC and development fairness associate at StepStone, informed TechCrunch he doesn’t assume that’s essentially true. He thinks LPs are nonetheless simply as , however after the wild valuations of 2020 and 2021, lots of which have evaporated now, they’re searching for enterprise methods that return outcomes sooner and with much less threat.
“LPs’ curiosity stage in enterprise capital continues to be robust,” Borton mentioned. “Plenty of LPs are searching for broader or extra differentiated methods of constructing their enterprise publicity and I believe secondaries as a way of constructing that publicity actually resonated.”
He added LPs are searching for methods to spend money on venture-backed firms with out as lengthy of a holding interval too. VCs, particularly those who make investments on the early levels, maintain investments the longest of any non-public asset class.
“Plenty of LPs realized the lesson that you may’t time the enterprise capital market,” Borton mentioned. “There continues to be this institutional dedication to the asset class that we haven’t essentially seen in previous cycles. LPs aren’t dropping out, they’re simply being extra selective in who they’re backing and ensuring they’re doing it in the appropriate manner.”
This fundraise additionally reveals what LPs are eager about the first late-stage market too. LPs could also be selecting to again a secondaries automobile over a standard 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, in keeping with PitchBook knowledge. In the meantime, many secondaries offers nonetheless commerce at a reduction, in keeping with 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 searching for 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 consumers for these secondary stakes exterior of devoted secondaries funds, hedge funds, and crossover traders like Constancy and T.Rowe Worth.
Borton mentioned that $3.3 billion is definitely a small fund once 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.
“We’ve got the most important fund however we really consider that’s nonetheless undersized relative to the market alternative in entrance of us,” Borton mentioned. “This enables to be very selective in what we select and transact on.”
Enterprise secondaries exercise is up this yr in comparison with final. Javier Avalos, the co-founder and CEO of Caplight, informed TechCrunch that its platform has tracked $600 million of transaction quantity thus far this yr, 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 TechCrunch over e-mail. “In Q2 of 2023, the typical closed secondary commerce dimension we noticed was $1 million. We’ve seen nearly double the closed commerce dimension this quarter, indicating extra institutional investor consumers 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 house, 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 better. StepStone’s fund might not be the most important fund for lengthy.
