StepStone has raised the largest fund in history intended to take a position in enterprise subsidiaries – the company announced last week. This fundraising speaks volumes not only about the investment prowess of StepStone’s secondary firms, but also about how LP investors think about the current enterprise capital market.
StepStone VC Secondaries Fund VI raised $3.3 billion. This marks a major step forward in comparison with the fund’s predecessor, which closed at $2.6 billion in 2022, a then-record amount. Fund VI was raised from each existing and recent LPs and was oversubscribed, in line with StepStone.
Secondary funds like StepStone buy investors’ existing stakes in each individual startups, called direct secondary firms, and LP interests in enterprise funds. Direct secondaries allow investors to access startup equity in firms that are already successful and near exit, meaning less risk and less time to show a profit.
This record-breaking fund comes at a time when enterprise funding is plummeting. According to PitchBook data, enterprise capital funds raised $66.9 billion in 2023. This represents a 61% decline in comparison with 2022, when the funds closed at a record $172.8 billion.
While negative overall enterprise fundraising numbers may suggest that long-term investors are less interested in investing in startups, Brian Borton, VC partner and growth capitalist at StepStone, told TechCrunch that he doesn’t think that is necessarily true. He believes long-term investors are still just as interested, but after the crazy valuations of 2020 and 2021, many of which have already evaporated, they are looking for enterprise strategies that deliver results faster and with less risk.
“The level of LP interest in venture capital continues to be strong,” Borton said. “Many LP producers are looking for broader or more diverse ways to build exposure for their venture, and I think secondary methods as a method of building that exposure have certainly made a splash.”
He added that long-term investors are looking for ways to take a position in firms with enterprise capital funds without such a long period of holding the company. VCs, especially those who invest in early stages, hold investments the longest of any private asset class.
“Many investors have learned the lesson that you can’t be timely in the venture capital market,” Borton said. “There continues to be institutional commitment to this asset class that we haven’t necessarily seen in previous cycles. LPs are not giving up, they are just being more selective about who they support and making sure they do it the right way.”
This fundraiser also shows what record producers think about the late-stage primary market. LPs may decide to support a secondary vehicle slightly than a traditional late-stage or growth-focused fund for price reasons. Median late-stage valuations have actually increased since their initial decline as the market cooled in 2022, in line with PitchBook data. Meanwhile, many secondary transactions proceed to be sold at a discount, in line with data from trade tracking platform Caplight.
The closing of the fund and what it says about LP interest in late-stage startups and enterprise capital firms ought to be excellent news for VCs. Many VCs are looking for liquidity in a still quiet exit market, and while investors and startups need to sell shares, not every investor is allowed to purchase them.
Venture firms, unless they are registered investment advisers, can only hold as much as 20% of their portfolio in secondary shares, on SEC requirements. That means there aren’t many buyers for these secondary shares outside of specialised secondary funds, hedge funds and crossover investors like Fidelity and T. Rowe Price.
Borton said $3.3 billion is actually a small fund when you look at the potential size of the secondary enterprise capital market, which continues to grow as startups stay private longer.
“We have the largest fund, but we truly believe it is still too small for the market opportunities that lie ahead of us,” Borton said. “This allows us to be very selective about what we choose and what we transact on.”
Venture secondary activity has increased this 12 months in comparison with last. Javier Avalos, co-founder and CEO of Caplight, told TechCrunch that his platform has seen $600 million in transaction volume this 12 months, a 50% increase over annual activity at this time in 2023.
“What is encouraging is that the increase in volume is driven by both an increase in closed deals and an increase in average deal size,” Avalos told TechCrunch by email. “In Q2 2023, the average closed secondary trade volume we saw was $1 million. This quarter, we saw almost double the volume of closed deals, which indicates that more institutional investors are active in the market as these funds tend to participate in larger deals than retail investors.”
If LPs grow to be increasingly interested in the secondary enterprise space and trading volume continues to grow, Borton could also be correct that while the $3.3 billion StepStone fund is currently the largest, there is room in the market for more funds of this size size or larger. The StepStone fund will not be the largest fund for long.