LPs' demand for liquidity drives VCs to secondary markets
By Marina Temkin (Pitchbook)
June 29, 2023
SUMMARY OF THE ARTICLE:
- LPs being upset on recent VC asset class performance: funds were deployed too quickly, valuations of portfolio companies ballooned to unrealistic levels, but the biggest grievance is that cash distributions from venture funds have been nowhere near as high as PE and growth equity funds
- Gone are the days when LPs were happy to back funds with strong paper returns. A measure known as distribution to paid-in capital (DPI), which refers to how much capital a manager returned relative to what was invested, has become more important than all other metrics during the downturn
- IPOs and M&A exits the lowest they've been in years. Investors had expected many companies to go public by now, but now it looks like it may be three or four more years until they can IPO
- As LPs push for DPI, selling a stake to new investors—even if it's at a hefty discount to the company's last valuation—is a no-brainer for many early-stage VCs that want to raise their next fund
- The pressure to send money to LPs is driving some VCs to sell portfolio company stakes on the secondary markets, but buyers are interested only in the best assets, while less attractive companies are not generating much demand, even at big discounts.
- Institutional LPs are not interested in companies that raised their primary rounds at inflated 100X+ ARR multiples in 2021 (ARR stands for "annual recurring revenue" or "ARR"). With multiples now at 5x to 12x ARR, such companies may never grow into their previous valuations.
- Buyers of startup secondaries have composed their target lists which enumerate much lower in number targets than the 1,000 unicorns hoping for an exit.
- Companies which shares suffered steep valuation drops are facing demotivated management teams who are not looking forward to work hard toward an exit at a price level that is lower to what their shares were granted to them in previous years.
By Marina Temkin (Pitchbook)
June 29, 2023
SUMMARY OF THE ARTICLE:
- LPs being upset on recent VC asset class performance: funds were deployed too quickly, valuations of portfolio companies ballooned to unrealistic levels, but the biggest grievance is that cash distributions from venture funds have been nowhere near as high as PE and growth equity funds
- Gone are the days when LPs were happy to back funds with strong paper returns. A measure known as distribution to paid-in capital (DPI), which refers to how much capital a manager returned relative to what was invested, has become more important than all other metrics during the downturn
- IPOs and M&A exits the lowest they've been in years. Investors had expected many companies to go public by now, but now it looks like it may be three or four more years until they can IPO
- As LPs push for DPI, selling a stake to new investors—even if it's at a hefty discount to the company's last valuation—is a no-brainer for many early-stage VCs that want to raise their next fund
- The pressure to send money to LPs is driving some VCs to sell portfolio company stakes on the secondary markets, but buyers are interested only in the best assets, while less attractive companies are not generating much demand, even at big discounts.
- Institutional LPs are not interested in companies that raised their primary rounds at inflated 100X+ ARR multiples in 2021 (ARR stands for "annual recurring revenue" or "ARR"). With multiples now at 5x to 12x ARR, such companies may never grow into their previous valuations.
- Buyers of startup secondaries have composed their target lists which enumerate much lower in number targets than the 1,000 unicorns hoping for an exit.
- Companies which shares suffered steep valuation drops are facing demotivated management teams who are not looking forward to work hard toward an exit at a price level that is lower to what their shares were granted to them in previous years.
