Hans Swildens will be lucky if he’s able to take a vacation this year. The founder and chief executive of Industry Ventures, one of the biggest players in venture capital secondaries, said he’s busier than ever, fielding late-night calls from freaked out tech execs looking to sell fund stakes.
“This is a work-your-ass-off year,” Swildens told Venture Capital Journal. “We’re inversely correlated to the primary market.”
Selling VC funds on the secondaries market was fairly slow for most of last year, as sellers and buyers couldn’t agree on pricing. Even after the sharp stock market downturn, sellers continued to hold out hope that the correction wouldn’t bleed into private company valuations. Now they appear to be accepting reality.
“It felt like everyone was in denial in Q1 and Q2, they got concerned in Q3, and then in Q4 they just accepted that everything is going to get reset,” Swildens said. “I think we really started to see that in November and December. This year, everyone is just working through the reset.”
Over the past three weeks, he has started to hear from LPs at risk of defaulting on capital calls from venture funds because of lack of liquidity, something he hasn’t seen since 2009 or 2010. “It’s small – like one a day now,” he said. “I got a call last night on one, and the night before I also got a call.”
The LPs are typically individuals. “It’s an overextended family office or an entrepreneur who was at one of these high-flying public companies, and their stock sold off and their balance sheet went upside down,” he explained. In many cases, the individuals invested in VC funds after their tech companies went public and their net worth ballooned, but now their net worth has deflated along with their company’s stock price, he said.
Discounts for VC stakes are generally steeper than they are for PE funds because it’s a riskier asset class. For the overall private equity market, “Average pricing for LP sales was 81 percent of NAV [in 2022], representing a 1,100-basis-point decline from 2021 pricing,” Jefferies wrote in its recently published Global Secondary Market Review. “Pricing steadily decreased throughout 2022 due to a growing disconnect between public and private company valuations.”
In the venture fund market, Swildens said he expects the NAV discount to go from a range of 40 to 60 percent last year to 30 to 50 percent in Q3. To put that into perspective, the historical average NAV discount for a VC fund is about 15 to 20 percent, he said. The discounts will shrink as underlying assets get repriced.
So, who’s selling?
“The market is so huge now that everyone is selling now,” Swildens said. “It’s not just one segment. It’s pensions funds, endowments, tech executives, family offices, hedge funds.”
What’s happening with VC secondaries mirrors the broader private equity market. “Most LP sellers sought to rebalance their portfolios given overallocation to private equity, and approximately 50 percent of all LP sellers were first-time sellers,” Jefferies wrote in its report. “A widening bid/ask spread kept many potential sellers on the sidelines.”
Even though LP sales of PE portfolios declined 13 percent from 2021, they outpaced GP-led volume for only the first time since 2019. Overall secondary volume totaled about $108 billion last year, down from the record $132 billion in 2021, with LP volume accounting for about $56 billion and GP-leds accounting for about $52 billion, Jefferies said.
Todd Miller, global co-head of private capital advisory at Jefferies, said in an interview with affiliate title Buyouts: “Capital calls are now outpacing distributions for LPs. That’s the first time that’s happened in several years. We think that’s going to continue for a while. That will put pressure on LPs to do more sales, and supply will build. We expect this to be a very active year.”