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A US private capital group has raised a record pool of cash to buy stakes in existing venture capital funds at large discounts, spotting a “massive and growing opportunity” after investors became overexposed to start-up bets amid a frenzy of investment activity in 2020 and 2021.
New York-based StepStone Group has closed a $3.3bn fund to buy stakes in existing VC funds from pensions, sovereign wealth investors, family offices and wealthy individuals. The fund is more than 25 per cent larger than its prior pool targeting venture fund stakes, which had been the industry’s largest.
The fundraise comes as many investors who ploughed record amounts of money into start-up investments when interest rates were low are now looking for ways to trim their exposure amid a dearth of initial public offerings and takeover activity, creating an opportunity for StepStone and others to buy at large discounts.
John Avirett, a partner at StepStone, said in an interview with the Financial Times: “There is a massive amount of [investment] that is still stuck in mature venture funds . . . It is north of $1tn and growing year by year, especially if you have IPO markets that are not open. It is a massive and growing opportunity set.”
Brian Borton, another partner at StepStone, added: “Over the past two years, discounts have averaged in the low 30 per cent to [a fund’s] net asset value.”
StepStone is a specialist in buying stakes in private investments such as corporate buyouts and direct lending funds, managing nearly $160bn in assets. In recent years, it has prioritised the VC industry, spotting liquidity challenges faced by large institutions.
During an era of rock-bottom interest rates, the venture capital industry’s overall assets under management increased from $600bn in 2014 to $3.3tn presently, according to PitchBook. About half that investment is stuck in funds raised between 2010 and 2018, which ordinarily would have been exited through IPOs or the sales of start-ups to larger technology groups.
But after a swift rise in interest rates beginning in 2022, there have been few IPOs and technology-oriented takeover activity has fallen sharply, declining more than 50 per cent in 2023, according to US law firm Cooley. That has left venture investors with limited options to sell down their holdings and caused their investors to increasingly exit by selling their fund stakes at large discounts to new buyers.
StepStone has in recent years purchased stakes in venture funds managed by Andreessen Horowitz, Tiger Global, Yuri Milner’s DST Global, Insight Partners, Lightspeed Partners and Josh Kushner’s Thrive Capital, according to securities filings. It has also made direct purchases of investments in start-ups including UK digital bank Monzo.
Borton said StepStone increasingly believed many tech companies, especially those selling recurring software subscriptions, had adjusted to higher interest rates. He conceded funds raised at the end of a decade-long bull market in valuations in 2020 and 2021 would continue to face challenges and potential writedowns.
“We are generally on the other side of the correction,” said Borton, who added that deals done in 2020 and 2021 “still need to be worked through”.
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