StepStone buys in VC strip sale with double unicorn exposure

Primary Venture Partners has completed a $95 million strip sale to StepStone Group, generating liquidity for limited partners in its first fund, affiliate title Venture Capital Journal has learned.

Given the age of the fund and the lack of visibility about when the M&A and IPO markets will rebound, Primary decided to take some money off the table. It sold 30 percent of its ownership in PVP Fund I, which closed on $61.4 million in 2015.

“Our job is to send money back to the pensioners, endowments and foundations we manage money for,” said Brad Svrluga, co-founder and general partner of the New York firm, which has about $1 billion under management. “These people rely on the liquidity.”

New York State Common Retirement Fund is the only disclosed LP for Fund I. Investors known to be in other Primary funds include Boston Children’s Hospital Trust, Memorial Hermann Foundation, the Sobrato Family Foundation, StepStone and Vintage Investment Partners.

New York Common, which contributed nearly $34 million to Fund I, reported in March last year that it had received distributions of nearly $40 million, which works out to a DPI multiple of 1.17x. The pension said the total value of Fund I was about $221 million, for a TVPI multiple of 6.51x.

Svrluga, who declined to comment on the details of Fund I’s performance, said: “If it never delivers another dime, it will be a good fund. We think it’s going to deliver three to five times more than it has already delivered and, empirically, so do the folks at StepStone”.

The venture business has been in an exit drought for the last couple of years and there is no guarantee that there will be a significant improvement this year or next. “If it takes five years to generate a ton more liquidity, that may well be fine for StepStone because they just started the clock ticking, but that puts me 13 years out,” Svrluga said. “And that’s not my job. My job is to deliver the whole damn thing back in 10-12 years.”

Fund I, which invested in a total of 25 companies, continues to hold stakes in 19 of them, including seven that are “true long-term value drivers”, Svrluga noted.

The portfolio includes at least two fintech unicorns: Alloy and Vestwell. Alloy, which describes itself as an “identity risk management company”, raised $52 million at a $1.55 billion valuation in September 2022, according to a TechCrunch report. Vestwell, a savings and investment platform, raised $125 million at a $1 billion valuation in December, according to a Bloomberg report.

Until recently, many potential sellers were reluctant to complete deals, put off by the steep discounts being offered. Hunter Somerville, a partner at StepStone Group, said he is seeing more potential buyers coming in off the sidelines.

“As people have taken their medicine and have done discretionary markdowns, things have now mostly settled to a point where it’s time to consider it,” he said. “We’ve seen a pretty significant supply pick up over last two to three quarters.”

Somerville expects deal volume to grow this year. “What we’re seeing from GPs is that they are increasingly getting questions from their LPs around how they are going to get DPI higher,” he said. “More GPs are considering whether there are solutions like this that translate a high TVPI to a higher level of DPI.”

StepStone teamed up with Industry Ventures in December to complete a secondaries transaction for Group 11 of Los Angeles. They paid $20 million for 12 percent of the venture firm’s second fund. “The deal enabled investors in Group 11’s second fund (2015 vintage) to realise their positions partially or entirely,” Group 11 said in a statement. “Through this deal, participating Group 11 investors received a ~3x net cash on cash return, representing a 20 percent net IRR on their investment.”

Jefferies found “a notable increase in supply” in VC portfolios in 2023, which grew from about 8 percent to 12 percent of overall secondaries volume. Total secondaries volume hit $112 billion in 2023, up 4 percent from $108 billion in 2022. Sale of VC assets was muted as, “Buyer confidence in [VC] asset values remained low amidst the risk of down rounds in a challenging fundraising environment”, Jefferies wrote in its Global Secondary Market Review, January 2024.

StepStone did not disclose the size of the discount it received for the Primary deal. LPs’ VC portfolios were going for 68 cents on the dollar on the secondaries market last year compared to 91 cents for buyout portfolios, according to Jefferies.

“One of the challenges people may find in the market for these things is that there is a material bid-ask spread based on the expectations of the GP on one side and the purchaser on the other,” Svrluga told VCJ. “But I think the thing that drove [StepStone] to get comfortable with a discount that was really attractive to us is the fact that there are many very strong future value drivers in this portfolio.”