StepStone raised the largest fund ever dedicated to investing in venture secondaries, the firm Announced last week. This fundraising not only says a lot about the investing prowess of StepStone’s venture secondaries, but also about how LPs think about the current venture market.
The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a big step forward from the fund’s predecessor, which closed at $2.6 billion, a record size at the time, in 2022. Fund VI was raised from existing and new LPs and was oversubscribed, according to StepStone.
Secondary funds like StepStone’s buy equity stakes from existing investors in both individual startups, known as direct secondaries, and LP stakes in venture funds. Direct secondaries allow LPs to access early stakes in companies that are already successful and about to exit, which means less risk and less time to reward.
This record-breaking fund comes at a time when venture fundraising has declined dramatically. In 2023, venture funds raised $66.9 billion, according to data from PitchBook. That marks a 61% decline from 2022, when the funds closed with a record $172.8 billion.
While the overall negative venture fundraising numbers may imply that LPs are less interested in investing in startups, Brian Borton, a VC and growth capital partner at StepStone, told TechCrunch that he doesn’t think that that is 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 risk strategies that deliver results faster and with less risk.
“The level of LP interest in venture capital remains strong,” Borton said. “Many LPs are looking for broader or more differentiated ways to build their risk exposure and I think secondaries as a method of building that exposure certainly resonated.”
He added that LPs are looking for ways to invest in venture capital-backed companies without such a long holding period. Venture capitalists, especially those who invest in the early stages, are the ones who hold investments longer than any private asset class.
“Many LPs learned the lesson that you can’t time the venture capital market,” Borton said. “There continues to be this institutional commitment to the asset class that we haven’t necessarily seen in past cycles. “LPs aren’t throwing in the towel, they’re just being more selective about backing 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 rather than a traditional late-stage or growth-stage focused fund due to price. In fact, median late-stage valuations have risen since their initial drop as the market cooled in 2022, according to data from PitchBook. Meanwhile, many secondary deals are still trading at a discount, according to data from secondary deal tracking platform Carta.
The closing of this fund, and what it says about LP interest in late-stage startups and venture secondaries, should be good news for venture capitalists. Many venture capitalists are seeking liquidity in a still-quiet exit market, and while investors and startups want to sell stakes, not all investors can buy.
Venture firms, unless they are registered investment advisors, can only hold up to 20% of their portfolio in secondary holdings, for SEC Requirements. This means there aren’t many buyers for these secondary holdings outside of dedicated secondary 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 venture secondary market, which continues to grow as startups remain private longer.
“We have the largest fund, but we really believe it is still insufficient relative to the market opportunity before us,” Borton said. “This allows us to be very selective in what we choose and what we transact.”
Secondary risk activity has increased this year compared to last. Javier Ávalos, co-founder and CEO of Caplight, told TechCrunch that his platform has recorded a transaction volume of $600 million so far this year, which represents a 50% increase over the year’s activity there. time of 2023.
“What is encouraging is that the increase in volume comes from both an increase in the number of closed trades and an increase in the average trade size,” Avalos told TechCrunch via email. “In Q2 2023, the average closed secondary trade size we observed was $1 million. “We have seen almost double the size of deals closed this quarter, indicating that there are more institutional investor buyers active in the market, as these funds typically engage in larger deals than individual investors.”
If LPs are increasingly interested in the venture secondaries space and trading volume continues to increase, Borton might be right that while StepStone’s $3.3 billion fund is the largest now, the market has room for more funds of that size or larger. The StepStone fund may not be the largest fund for long.