StepStone has raised the largest fund dedicated to investing in secondary ventures ever, the company Announce last week. This fundraising campaign speaks volumes not only about StepStone’s secondary venture investing prowess, but also about how LPs think about the current venture market.
The fund, StepStone VC Secondaries Fund VI, has raised $3.3 billion. This represents a big step forward from the previous fund, which closed at $2.6 billion, a record size at the time, in 2022. The sixth fund was raised from existing and new limited partners and was oversubscribed, according to StepStone.
Secondary funds, such as StepStone, buy existing investors’ equity stakes in both individual startups, known as direct secondaries, and LP stakes in venture funds. Direct secondaries allow limited partners access to startup stakes in already successful companies that are nearing an exit, meaning less risk and less time to reward.
This record fund comes at a time when fundraising has declined sharply. In 2023, venture funds raised $66.9 billion, according to PitchBook data. This represents a 61% decline from 2022 when the funds closed on a record $172.8 billion.
While the overall negative fundraising numbers for the venture may suggest that LPs are less interested in investing in startups, Brian Burton, venture capital and growth partner at StepStone, told TechCrunch that he doesn’t think that’s necessarily true. He believes LLCs are still just as interested, but after the runaway valuations of 2020 and 2021, much of which have now evaporated, they are looking for venture strategies that deliver results faster and with less risk.
“The level of interest from limited companies in venture capital remains strong,” Burton said. “A lot of limited partners are looking for broader or more differentiated ways to build exposure for their ventures, and I think secondary institutes as a way to build that exposure definitely resonates.”
He added that LPs are looking for ways to invest in venture-backed companies without a long holding period as well. Venture capital firms, especially those that invest in early stages, hold investments longer than any private asset class.
“A lot of LPs have learned the lesson that you can’t time the venture capital market,” Burton said. “There is still this institutional commitment to the asset class that we haven’t necessarily seen in past cycles. Limited partners are not giving up, they are becoming more selective about who they back and making sure they are doing it the right way.
This fundraising also shows what limited partners think about the late-stage primary market as well. Limited partners may choose to back a secondary vehicle rather than a traditional late-stage or growth-stage focused fund due to price. In fact, median valuations have been rising lately since their initial decline when the market cooled in 2022, according to PitchBook data. Meanwhile, many secondary deals are still trading at a discount, according to data from secondary deal tracking platform Caplight.
The closing of this fund, and what it says about LP’s interest in late-stage startups and spinoffs, should be good news for venture capital. Many venture capital firms are looking for liquidity in a still-quiet exit market, and while investors and startups want to sell their stakes, not every investor is allowed to buy.
Investment companies, unless they are registered investment advisors, can only hold up to 20% of their investment portfolio in secondary interests, per SEC requirements. This means that there are not many buyers for these secondary stakes outside of dedicated secondary funds, hedge funds and crossover investors like Fidelity and T. Rowe Price.
Burton said $3.3 billion is actually a small amount when you consider the potential size of the secondary venture market, which continues to grow as startups continue to stay private longer.
“We have the largest fund but we really think it’s still underestimated compared to the market opportunity we have,” Burton said. “This allows us to be very selective in what we choose and deal with.”
Secondary institute activity increased this year compared to last year. Javier Avalos, co-founder and CEO of Caplight, told TechCrunch that its platform has tracked $600 million in transaction volume so far this year, which represents a 50% increase over annual activity at this time in 2023.
“What is encouraging is that the increase in volume is coming from an increase in the number of closed trades and an increase in average trade size,” Avalos told TechCrunch via email. “In Q2 2023, the average closed secondary trade volume we observed was $1 million. We saw close trade volume nearly double this quarter, indicating that more buyers from institutional investors are active in the market, as these Funds are typically in larger positions than individual investors.
If limited partners are increasingly interested in the secondary venture space, and trading volume continues to increase, Burton may be right that while StepStone’s $3.3 billion fund is now the largest, the market has room for more funds of that size or larger. The StepStone fund may not be the largest fund for long.