Investors in VC funds and shareholders of VC-backed companies are hungry for liquidity, but they have been reluctant to accept the steep discounts on net asset value that sellers have been offering. That may be about to change.
At least that’s the hope of Brookfield Asset Management and Sequoia Heritage, Sequoia Capital’s wealth fund, which launched a joint effort called Pinegrove Capital Partners in order to “capitalise on plunging valuations of venture capital-backed companies”, according to a report by the FT last week.
Brookfield and Sequoia will each invest $250 million in Pinegrove, which is seeking a total of $2 billion from institutional investors for its debut fund, the FT reported.
Pinegrove, based in Los Angeles, is led by founding partner and chief executive Brian Laibow, previously co-head of North America and managing director for Oaktree Capital Management’s flagship Global Opportunities strategy, according to his LinkedIn profile. Laibow’s profile describes Pinegrove as “the trusted secondary and special situations capital partner for venture capital and growth equity GPs and LPs”.
Pinegrove may be coming to market at just the right time, as would-be sellers have been holding off in hopes of fetching better prices. Industry Ventures, one of the biggest players in venture capital secondary deals, had predicted that the venture secondaries market could top $130 billion this year, but it is looking less likely that the forecast will come true.
“There is more than $130 billion of supply, and supply keeps building, but the bid prices are averaging 40 to 65 percent off NAV, and this is holding back any sellers in the market from transacting,” Industry Ventures founder and chief executive Hans Swildens told affiliate title Venture Capital Journal this week.
VC secondary deals include fund portfolios sold by LPs and shares in VC-backed companies sold by founders, employees and other shareholders. LPs in particular have been eager for more liquidity, as they have seen distributions from VC and PE funds dry up this year due to stalled M&A and IPO markets. One large investor testing the market is Horsley Bridge Partners, a manager of venture funds of funds, which is shopping a portfolio of stakes in older funds that could total up to $1.5 billion, according to a report by affiliate title Buyouts.
At the start of this year, Swildens said he was seeing signs that VC secondaries were heating up, with more LPs accepting the reality of a down market. “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 in January.
However, the first half of the year has been slower than he anticipated. “We estimate that over $35 billion-plus transacted in the first half [of 2023], which is half our estimated volume estimate for the year,” Swildens said this week. “It’s unclear if the back half of the year will double to get us $70 billion more of size. If it does get back to that volume, then we will have a $105 billion estimated year in the market.”
H1 sellers included pension funds, endowments, hedge funds, corporates, founders, seed VC funds and family offices, which completed “thousands of transactions”, he noted.
Among the largest secondary transactions in the first half of the year was Stripe’s sale of about $6.5 billion-worth of employee shares in March. In an announcement for the deal, the payments company said it was valued at about $50 billion, down from the $95 billion valuation that investors assigned to Stripe in March 2021.
Just a few weeks ago, CNBC reported that SpaceX reached an agreement with new and existing investors to sell up to $750 million in stock from insiders at $81 a share, valuing the VC-backed company at nearly $150 billion.
“Even though Stripe, SpaceX and many others completed secondary transactions this year, the bid/ask spread that existed in 2022 is still persisting,” Swildens noted.
What will it take for the VC secondary market to accelerate? Swildens said if the IPO and M&A market come back from the dead, the secondary market “will start trading more as buyers will feel more comfortable with where exit values print. Buyers don’t have visibility into the IPO pricing yet by company or by sector as there are no IPOs. Also, when more acquisitions happen, we will all feel better about M&A multiples by sector and type of company”.