Bank failures boost demand for Industry Ventures’ 10th secondaries fund

The Silicon Valley Bank collapse in March rocked the venture industry. For Industry Ventures, the crisis helped to crystalise its value proposition for investors.

Hans Swildens, founder of the venture secondaries specialist, told affiliate Venture Capital Journal that he was anticipating a six to 12-month fundraising process after he and his team started pre-marketing their latest flagship fund in Q4.

He noted that existing LPs were saying things such as: “’We’re all working on our internal models’. ‘Our private equity allocation just increased because of the denominator effect’. ‘We have to look at our 2024 budgets and we don’t know how much we’re going to get’. ‘We’re going to our boards for budgeting and allocations next year and we might get cut’.”

Said Swildens: “There were just a lot of unclear conversations with probably more than half of investors around timing, size, ability to invest and when. Then, in Q1, when we launched the fundraise, we had some instability in the markets.”

Instability is a slight understatement. SVB and Signature Bank both failed in March, then First Republic Bank was taken over by regulators a few months later.

“What that whole liquidity conversation caused in the LP base was just a heightened interest in committing to the fund because they saw that we might be going through yet another big liquidity crisis,” Swildens said.

The angst resulted in an acceleration in commitments to Industry’s latest flagship, Industry Ventures Secondary X, which was targeting $1 billion. “Our fundraise went from thinking in Q4, ‘this is probably going to take a while’ to ‘we’re done’,” Swildens said.

Demand was so strong that the San Francisco-based firm could have raised upwards of $2.5 billion, instead opted to cap Industry Ventures Secondary X at $1.45 billion. That still makes it 70 percent larger than its ninth VC secondaries fund, which closed on $850 million in 2021.

Industry also raised $260 million for its second small tech buyout fund, which will do buyouts in software companies with enterprise values ranging from $30 million to $250 million and invest in emerging software buyout funds.

Pensions on board

LPs in Secondary X include the Los Angeles Water & Power Employees Retirement Plan (with a commitment of $75 million), the New Mexico Educational Retirement Board ($50 million) and the South Carolina Retirement System ($75 million), according to data from affiliate title Buyouts. Industry Ventures does not disclose the names of its investors.

LPs in previous funds include the Employees Retirement System of Texas and New Hampshire Retirement System.

Swildens estimated that about a third of the capital for the two new funds came from state and county pension funds, a third from endowments and foundations and a third from high-net-worth individuals, primarily through family offices. About 90 percent of the investors are based in the US, he said.

As with its previous funds, Industry will charge a fee of 1.5 percent during the investment period and carried interest of 15 percent (or 17.5 percent for LPs that require a hurdle rate). The funds are officially set up with an investment period of five years and a lifespan of 10 years, but the investment period typically lasts around three years.

Secondary X will buy LP stakes in VC funds, purchase stock in VC-backed companies and participate in special situations, such as buying an older corporate venture fund with one or two remaining assets. Since its founding in 2000, Industry has completed more than 600 secondary investments, including more than 400 secondary venture capital fund limited partnership interests and 170 direct secondary company share purchases, giving it exposure to more than 5,500 VC-backed companies, the firm said in a statement. The largest exits for its secondary strategy have come from investments in Uber, Alibaba, ZipRecruiter, Nubank, LifeLock, Marqeta, Roblox, Trustwave, Twitter and Upwork, it added.

Swildens said there is no shortage of opportunities in the VC secondary market: “What we’re seeing on the ground is an acceleration of transactions starting to happen.” The market stalled for a while as sellers and buyers couldn’t agree on price. “It has taken about a year for the bid/ask spread to be accepted,” he said. Recent IPOs of tech companies such as Instacart have helped sellers accept that what they thought were “unfair prices” were in fact reasonable, he said, noting that net asset values on average are down about 20 percent from last year.

Industry’s new funds come as competition has heated up in the venture capital secondaries market. Other managers targeting the space include StepStone Group, which is reportedly targeting more than $2.6 billion for its StepStone VC Secondaries Fund VI, and Pinegrove Capital Partners, a joint effort by Brookfield Asset Management and Sequoia Heritage that is seeking $2 billion.

Swildens acknowledges that his latest flagship fund “is small for the opportunity, but as a manager of institutional capital with a fiduciary duty, I would rather have a fund that seems a little bit smaller and be a little more prudent and have less pressure to invest than have too much money and not know what to do with it”.