StepStone eyes resurgent LP secondaries market with $3.6bn war chest

The firm has held the final close and first close on its latest venture capital and private equity secondaries funds, respectively, according to chief executive Scott Hart.

StepStone Group is hoping to capitalise on a resurgence of LP interest sales with nearly $4 billion of freshly raised capital for secondaries.

The listed firm held a $2.6 billion final close on StepStone VC Secondaries Fund V and a more than $1 billion first close on its private equity-focused StepStone Secondary Opportunities Fund V during the two months since 31 March, chief executive Scott Hart said on a Thursday earnings call.

The latter fund is expected to become active and fee paying later this year, he noted.

“We believe these two secondary funds position us extremely well for the current environment,” Hart said. “Many LPs are taking a more active approach to portfolio management as market volatility has shifted portfolio weightings, while fund distributions have slowed. We believe this will create significant volume in the secondaries market as LPs seek liquidity.”

VC Secondaries Fund V was raised by the Greenspring Associates team, which StepStone agreed to acquire last July and whose last independent secondaries fund was $800 million.

The LP secondaries market ground to a relative halt for much of the pandemic as volatility made it difficult for buyers to price diversified portfolios. Activity returned in the latter half of 2021 as private equity’s impressive performance and an increasingly congested fundraising environment pushed investors close to or, in some cases, above their allocation targets. This effect may be compounded by a rout in the public markets that has led to the denominator effect in some portfolios.

“I wouldn’t be surprised to see some level of LP secondaries come back,” Hart said. “And I think we’re already starting to see this in the first part of the calendar year here today.”

Nearly one-quarter (23 percent) of respondents to affiliate title Private Equity International’s LP Perspectives 2022 Study said they were overallocated to private equity for this year, up from 13 percent in 2021 and the highest percentage since the first survey in 2018.

More than 20 transaction worth $1 billion or more closed last year as limited partners sought to de-risk their portfolios and reduce exposure to non-core managers, according to adviser Greenhill.

Public Sector Pension Investment Board, for example, closed a roughly $1.5 billion sale of fund stakes toward the end of last year; State Teachers Retirement System of Ohio and Harvard Management Company also sold $1 billion-plus portfolios in 2021, while Florida Retirement System Trust Fund sold more than $2 billion. In January, Secondaries Investor reported that the California Public Employees’ Retirement System planned to sell up to $6 billion of PE stakes in what would be the largest ever portfolio sale.

Houston Firefighters’ Relief and Retirement Fund is holding its first-ever sale of stakes in private equity funds as it works to manage its allocation.

Pricing for traditional LP portfolio sales is uncertain, however, as private equity valuations lag the public markets by a quarter or two. As of April, some sellers were choosing to hold off on sales until valuation marks are set for 31 December or even 31 March.