If you want to know where the venture secondaries market is headed, just look at the evolution of private equity secondaries.
So says Brijesh Jeevarathnam, partner and global head of fund investments at Adams Street Partners.
Up to now, the venture secondaries market has mainly been made up of the purchases of LP stakes in VC funds and direct secondaries, or buying shares in start-ups from founders or other equity holders. Now we’re seeing the emergence of GP-led secondaries in venture. These types of deals represented about 20 percent of the PE secondaries market about 10 years ago but have since grown to more than half of the annual volume of deals.
GP-led deals typically involve a general partner creating a continuation vehicle (CV) to generate liquidity for LPs.
“They’ve been quite the feature on the buyout side, and they’re going to become more prevalent on the venture side,” Jeevarathnam tells Venture Capital Journal. “I think we will likely see more of the venture continuation vehicles across the venture portfolio because the time to liquidity is not getting shorter.” (Read more about Adams Street’s venture secondaries strategy here.)
About 14 percent of GP-led market volume in the first half involved growth and venture capital, which was up markedly from the first half last year, according to Lazard’s half-year secondary volume report. That compares to 79 percent of volume in buyouts GP-led deals, Lazard reports.
“We anticipate continued growth in growth capital and venture capital as the market matures and new sources of capital are raised,” Lazard states.
Recent examples of VC continuation vehicles include reported efforts by General Catalyst, Lightspeed Venture Partners and New Enterprise Associates, which aim to deliver proceeds to limited partners in older funds.
General Catalyst is working on a CV worth between $800 million and $1 billion, according to a report by TechCrunch, which cited a “person familiar with the plans.” As of early October, the makeup of the CV had not been determined, but it would “likely include stakes in Stripe, Gusto and Circle, the person said. The firm has recently hired Jefferies as its secondary investment adviser.”
In the case of Lightspeed, secondaries giant Lexington Partners has emerged as the lead investor on a multi-asset continuation fund, affiliate title Buyouts reported. The Lightspeed deal focuses on 10 assets from various older funds that will be moved into a continuation pool for more time and capital for the GP to manage the businesses, one source told Buyouts. The total deal is expected to raise around $1.5 billion, with a small portion of that reserved for fresh investments in the companies, the source said.
Lightspeed has shared the terms of the deal with its LPs, which will decide if they want to sell or roll their interests into the continuation fund, the source said.
LPs in NEA funds appear to have already moved on a $540 million CV created by NEA. The vehicle drew investments from Goldman Sachs Group’s alternatives unit, Industry Ventures, Pathway Capital Management and Goanna Capital, according to a Bloomberg report. The CV included stakes in 11 NEA portfolio companies, including Databricks, Plaid and Tempus, according to the report. (Buyouts broke the news about the NEA deal in a December 2023 report.)
Good deals?
CVs not only offer liquidity to distribution-hungry LPs, but they also generate strong returns for their investors, according to research by Morgan Stanley that was shared exclusively with affiliate title Secondaries Investor.
The investment bank took a set of 71 continuation funds of vintages between 2018 and 2023 and compared them against pools of returns data for secondaries and buyout vehicles. The data set comprised single-asset continuation vehicles (60 percent), with the remainder being multi-asset CVs.
The continuation funds delivered a median 1.4x multiple-on-invested-capital – on par with secondaries funds, and higher than buyout funds’ 1.2x median MOIC, Secondaries Investor reported. Moreover, upper-quartile continuation funds had a MOIC of 1.7x compared to 1.6x and 1.5x for upper-quartile secondaries and buyouts, respectively.
Note that the vast majority of the returns in Morgan Stanley’s data set are unrealized, with about 85 percent of the MOIC on paper.
Continuation funds’ potential outperformance was even more pronounced when it came to single-asset vehicles, with more than a 400 basis point difference in outperformance between the upper quartile of single-asset funds versus multi-asset ones.
“If you get it correct – and there’s a big if – the upper quarter of the single-asset strategy has the potential to outperform the secondaries strategy and the multi-asset strategy,” Chad Carroll, Morgan Stanley’s global head of private capital advisory, told Secondaries Investor.
Adam Le and Chris Witkowsky contributed to this story
If you want to know where the venture secondaries market is headed, just look at the evolution of private equity secondaries.
So says Brijesh Jeevarathnam, partner and global head of fund investments at Adams Street Partners.
Up to now, the venture secondaries market has mainly been made up of the purchases of LP stakes in VC funds and direct secondaries, or buying shares in start-ups from founders or other equity holders. Now we’re seeing the emergence of GP-led secondaries in venture. These types of deals represented about 20 percent of the PE secondaries market about 10 years ago but have since grown to more than half of the annual volume of deals.
GP-led deals typically involve a general partner creating a continuation vehicle (CV) to generate liquidity for LPs.
“They’ve been quite the feature on the buyout side, and they’re going to become more prevalent on the venture side,” Jeevarathnam tells Venture Capital Journal. “I think we will likely see more of the venture continuation vehicles across the venture portfolio because the time to liquidity is not getting shorter.” (Read more about Adams Street’s venture secondaries strategy here.)
About 14 percent of GP-led market volume in the first half involved growth and venture capital, which was up markedly from the first half last year, according to Lazard’s half-year secondary volume report. That compares to 79 percent of volume in buyouts GP-led deals, Lazard reports.
“We anticipate continued growth in growth capital and venture capital as the market matures and new sources of capital are raised,” Lazard states.
Recent examples of VC continuation vehicles include reported efforts by General Catalyst, Lightspeed Venture Partners and New Enterprise Associates, which aim to deliver proceeds to limited partners in older funds.
General Catalyst is working on a CV worth between $800 million and $1 billion, according to a report by TechCrunch, which cited a “person familiar with the plans.” As of early October, the makeup of the CV had not been determined, but it would “likely include stakes in Stripe, Gusto and Circle, the person said. The firm has recently hired Jefferies as its secondary investment adviser.”
In the case of Lightspeed, secondaries giant Lexington Partners has emerged as the lead investor on a multi-asset continuation fund, affiliate title Buyouts reported. The Lightspeed deal focuses on 10 assets from various older funds that will be moved into a continuation pool for more time and capital for the GP to manage the businesses, one source told Buyouts. The total deal is expected to raise around $1.5 billion, with a small portion of that reserved for fresh investments in the companies, the source said.
Lightspeed has shared the terms of the deal with its LPs, which will decide if they want to sell or roll their interests into the continuation fund, the source said.
LPs in NEA funds appear to have already moved on a $540 million CV created by NEA. The vehicle drew investments from Goldman Sachs Group’s alternatives unit, Industry Ventures, Pathway Capital Management and Goanna Capital, according to a Bloomberg report. The CV included stakes in 11 NEA portfolio companies, including Databricks, Plaid and Tempus, according to the report. (Buyouts broke the news about the NEA deal in a December 2023 report.)
Good deals?
CVs not only offer liquidity to distribution-hungry LPs, but they also generate strong returns for their investors, according to research by Morgan Stanley that was shared exclusively with affiliate title Secondaries Investor.
The investment bank took a set of 71 continuation funds of vintages between 2018 and 2023 and compared them against pools of returns data for secondaries and buyout vehicles. The data set comprised single-asset continuation vehicles (60 percent), with the remainder being multi-asset CVs.
The continuation funds delivered a median 1.4x multiple-on-invested-capital – on par with secondaries funds, and higher than buyout funds’ 1.2x median MOIC, Secondaries Investor reported. Moreover, upper-quartile continuation funds had a MOIC of 1.7x compared to 1.6x and 1.5x for upper-quartile secondaries and buyouts, respectively.
Note that the vast majority of the returns in Morgan Stanley’s data set are unrealized, with about 85 percent of the MOIC on paper.
Continuation funds’ potential outperformance was even more pronounced when it came to single-asset vehicles, with more than a 400 basis point difference in outperformance between the upper quartile of single-asset funds versus multi-asset ones.
“If you get it correct – and there’s a big if – the upper quarter of the single-asset strategy has the potential to outperform the secondaries strategy and the multi-asset strategy,” Chad Carroll, Morgan Stanley’s global head of private capital advisory, told Secondaries Investor.
Adam Le and Chris Witkowsky contributed to this story
