The NEA spin-out – a glimpse of VC’s future

Goldman Sachs and Hamilton Lane's backing of a $1.35bn VC directs deal shows it is no longer a place where buyers struggle to write big tickets.

Most spin-outs, unless forced by regulation, centre around diverging paths: a captive investment team grows too big for its cage or a financial institution loses its taste for private markets. That’s one of the things that makes this week’s spin-out from the world’s largest venture capital firm, New Enterprise Associates, so unusual.

On Wednesday it emerged that Goldman Sachs, Hamilton Lane and 18 other investors had put up $1.35 billion to help a team led by general partner Ravi Viswanathan spin out of NEA. Most of that cash went on the purchase of 31 direct stakes held in four different NEA funds. These companies will now be managed by the new team, known as NewView Capital.

Not only did the spin-out take place with the full support of NEA’s management, but it could prove integral to the way it, and other venture capital firms, do business in future.

NEA has for a long time struggled with unrealised investments. They number in the hundreds, Secondaries Investor understands. While there have been many successful exits and, at the other end of the spectrum, companies that have failed to take off, it is those in the middle that present the real problem.

Many of these could be a great success with more care and capital, two things the organisation is not set up to provide. This situation has been exacerbated by recent senior departures. The 31-stake portfolio contains a number of companies whose sponsors have left NEA, Secondaries Investor understands.

NEA’s solution has been, in effect, to create a direct secondaries feeder fund managed by NewView Capital. With help from secondaries backers, NewView will manage these companies to exit and if it proves a success, carry on in the same fashion.

“There’s no reason why you can’t replicate this model with venture fund II, III and IV, eventually across different managers,” said one secondaries source with close knowledge of the deal. “I think it’s their intention to do more transactions like this. They may not be as big, but I think there are opportunities because other funds are struggling with the same problem.”

The deal shows just how far VC secondaries have come. The huge numbers of unrealised companies, plus the ability to buy direct secondaries stakes in one of the growing number of unicorns, means that big secondaries buyers can put hundreds of millions to work in a way that was unimaginable in the past.

“If you go back seven or eight years, there wasn’t a way to do venture at scale,” said the same source. “Today there’s all this value locked up and investors, although they are extremely happy with the performance on a mark to market basis, haven’t been able to get liquidity.”

The opportunity for secondaries buyers just got more interesting.

Are you aware of any other large direct secondaries opportunities? Let us know: