StepStone raised the largest fund dedicated to investing in secondary venture companies, the company was announced Last week. This fundraiser not only speaks volumes for the investment prowess of StepStone’s secondary businesses, but also for how LPs think about the current venture market.
The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a big step up from the fund’s predecessor, which closed at a then-record $2.6 billion in 2022. Fund VI was raised by both existing and new LPs and was oversubscribed, according to with StepStone.
Secondary funds like StepStone’s buy existing investors’ equity stakes in both individual startups, known as direct secondaries, and LP stakes in venture capital funds. Direct secondaries allow LPs to access seed stakes in already successful companies nearing exit, which means less risk and less time to reward.
This record-setting fund comes at a time when venture fundraising is in sharp decline. In 2023, venture funds raised $66.9 billion, according to PitchBook data. That marks a 61% decline from 2022, when the funds closed at a record $172.8 billion.
While negative overall venture fundraising numbers may suggest that LPs are less interested in investing in startups, Brian Borton, VC and growth equity partner at StepStone, told TechCrunch that he doesn’t think that’s necessarily true. He believes LPs are still just as interested, but after the wild valuations of 2020 and 2021, many of which have now evaporated, they are looking for business strategies that deliver results faster and with less risk.
“The level of LP interest in venture capital continues to be strong,” said Borton. “A lot of LPs are looking for broader or more diversified ways to build their venture exposure, and I think secondary factors as a method of building that exposure have definitely resonated.”
He added that LPs are looking for ways to invest in venture-backed companies without such a long holding period. VCs, especially those that invest in early stages, hold investments the longest of any private asset class.
“A lot of LPs have learned the lesson that you can’t time the venture capital market,” Borton said. “There continues to be that institutional commitment to the asset class that we haven’t necessarily seen in previous cycles. LPs aren’t cancelling, they’re just being more selective about who they support and making sure they do it the right way.”
This fundraising also shows what LPs are thinking about the late-stage primary market. LPs may choose to back a secondary vehicle over a traditional late-stage or growth-stage fund because of value. Median late-stage valuations have actually risen from their initial decline when the market cooled in 2022, according to PitchBook data. Meanwhile, many sub deals are still trading at a discount, according to data from sub deal tracking platform Caplight.
This fund close, and what it says about the LP’s interest in emerging startups and business spin-offs, should be good news for VCs. Many VCs are looking for liquidity in a still quiet exit market, and while investors and startups want to sell stakes not every investor is allowed to buy.
Venture firms, unless they are registered investment advisers, can only hold up to 20% of their portfolio in secondary shares, per SEC requirements. That means there aren’t many buyers for these sub shares outside of dedicated sub funds, hedge funds and crossover investors like Fidelity and T. Rowe Price.
Borton said $3.3 billion is actually a small fund when you look at the potential size of the secondary venture capital market, which continues to grow as startups continue to stay private longer.
“We have the largest fund, but we really think it’s still small relative to the market opportunity in front of us,” Borton said. “This allows us to be very selective in what we choose and what we trade.”
Secondary business activity is up this year compared to last year. Javier Avalos, the co-founder and CEO of Caplight, told TechCrunch that its platform has seen $600 million in transaction volume so far this year, which represents a 50% increase over annual activity now in 2023.
“What is encouraging is that the increase in volume is coming from both an increase in the number of trades closed and an increase in the average trade size,” Avalos told TechCrunch via email. “In the second quarter of 2023, the average closed secondary trade size we observed was $1 million. We have seen nearly double the size of closed deals this quarter, indicating that more institutional buyer investors are active in the market, as these funds typically engage in larger deals than individual investors.”
If LPs are increasingly interested in the secondary venture space and deal volume continues to grow, Borton may be right that while StepStone’s $3.3 billion fund is the largest now, the market has room for more capital of this size or larger. StepStone’s fund may not be the biggest fund for long.
