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Olav Ostin, managing accomplice at funding agency TempoCap, remembers a time just a few years in the past when secondaries — the sale of stakes in corporations or complete VC portfolios — have been decidedly unsexy.
Now, Ostin says, they’re sizzling stuff.
This week, London-based funding agency Molten Ventures acquired a 19% stake in early-stage VC Seedcamp’s third fund for €8.5m. And it’s unlikely to cease there.
“Our dealflow has gone from 1x to 5x,” says Ostin. Round 50% of TempoCap’s investments are secondaries.
He says that apart from Seedcamp, a number of different of Europe’s largest VCs have already begun making (unannounced) portfolio gross sales in a bid to generate much-needed liquidity, whereas loads of others are interested by it.
“The market’s definitely picked up,” Martin Davis, CEO at Molten Ventures, tells Sifted. “We’ve accomplished fairly just a few [portfolio acquisitions] just lately.”
The choices
The uptick is being pushed by VCs’ must generate liquidity for his or her LPs, at a time of muted IPO markets and dwindling exits.
“Individuals are coming to us and saying, ‘How can we create some liquidity? That is the portfolio: what is feasible?’,” says Ostin.
VCs can promote both complete or partial stakes in a handful of portfolio corporations or the entire portfolio.
Generally known as “strip gross sales”, these are essentially the most enticing means for VCs to return some capital to LPs proper now, says Jonathan Graham, managing director of secondaries at PE agency Asante Capital.
It’s a great way to de-risk the fund, he says. “For those who can return the entire fund via a strip sale, it’s not a foul place to be — though you restrict the upside.”
Graham says a lot of European VCs are strip gross sales. “The problem is, how do you make up that strip? Is it a full horizontal throughout the portfolio? [ie. a per cent of each company] Or cherry-picked?”
Molten prefers to purchase stakes in entire portfolios, says Davis, relatively than cherry-picking startups from inside a portfolio. Within the case of the Seedcamp fund, six of the belongings characterize 80% of the worth, he says. However due to the evergreen nature of Molten’s fund, it’s joyful to carry onto much less shiny startups in a portfolio relatively than speeding them to an exit.
“We are able to hold onto the tail in case we get a nice shock,” he says.
TempoCap prefers to cherry-pick a handful of corporations from inside a portfolio, significantly these valued at round €50-250m and with greater than €10m in income or annual recurring income, as they’re the best to exit, says Ostin.
“Our enterprise mannequin is to generate DPI of 1x in 5 years,” he says. Meaning TempoCap’s not concerned with unicorns — there simply aren’t sufficient patrons who can shell out for them, and IPO markets are just about closed.
Continuation funds
VCs do produce other choices for producing liquidity, together with by way of a continuation fund, which includes a agency organising a brand new funding car to accumulate portfolio corporations from one in every of its present funds.
Germany’s HV Capital is among the solely European funds to have publicly introduced a continuation fund thus far, again in 2022. Way more funds within the US, together with NEA and Perception Companions, have or are setting them up.
Launching a continuation fund means the VC can maintain onto its stakes in some portfolio corporations for longer, whereas additionally returning some capital to its LPs. This enables LPs the selection to reinvest within the new fund. New LPs can be introduced in.
“Fairly lots of people are speaking about continuation funds,” says Davis. “It offers you extra time to speculate the cash — and it begins the [management] charges ticking once more.”
However Graham thinks continuation funds will not be such an excellent choice within the present market.
“Beginning a continuation fund in the present day would most likely contain promoting complete corporations out of the fund, creating a brand new car to carry these belongings — wherein case you’d be much less more likely to get the valuations you need.”
That’s dangerous information for the unique fund’s LPs — and that in flip is dangerous information for VCs.
“The very last thing [VCs] wish to do is lower off returns for his or her present buyers, or disenfranchise them.”
Consumers’ market
For TempoCap and different secondaries homes, the solar is shining.
“It’s positively a purchaser’s market,” says Davis. He doesn’t count on VCs’ liquidity place to enhance this calendar 12 months.
It may be an excellent 12 months for secondaries corporations on the exit aspect.
“We’re promoting a lot of corporations for the time being,” says Ostin. TempoCap lists Depop and Tessian as exited portfolio corporations. “It’s attainable that by the tip of this 12 months we could have bought half of our portfolio.”
“There are patrons for good corporations, primarily coming from the US, and massive corporates from Europe,” he provides.
“Quite a lot of American patrons consider that in two to 3 years valuations might be increased. In order that they’re doing their buying now within the expectation that stuff will value rather more in two to 3 years’ time. There’s an enormous quantity of curiosity from US gamers.”
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