StepStone announced last week that it had raised its largest fund ever dedicated to venture secondaries, a raise that not only speaks to StepStone's venture secondaries expertise, but also to how its LPs think about the current venture market.
The fund, StepStone VC Secondaries Fund VI, has raised $3.3 billion, a significant improvement from the fund's predecessor, which closed at a then-record $2.6 billion in 2022. According to StepStone, Fund VI was oversubscribed, raising from both existing and new LPs.
Secondary funds like StepStone buy both existing investor shares in individual startups, called direct secondaries, and LP shares in venture funds. Direct secondaries give LPs access to startup shares in companies that are already successful and nearing an exit, meaning less risk and a faster time to reward.
The record fund comes at a time when venture fundraising is declining sharply: Venture funds raised $66.9 billion in 2023, according to PitchBook data, a 61% drop from 2022, when funds closed on a record $172.8 billion.
While the overall negative venture capital fundraising numbers may suggest that LPs are less interested in investing in startups, Brian Boughton, VC and growth equity partner at StepStone, told TechCrunch that's not necessarily the case. He believes LPs are still just as interested, but after the skyrocketing valuations of 2020 and 2021 (many of which have now vanished), they're looking for venture strategies that can deliver results faster and with less risk.
“LP interest in venture capital remains strong,” says Boughton. “I think a lot of LPs are looking for broader or more differentiated ways to build their exposure to venture, and secondaries as a way to build that exposure has definitely resonated.”
He added that LPs are also looking for ways to invest in venture-backed companies without long holding periods: VCs, especially those investing at an early stage, hold their investments the longest of any private asset class.
“Many LPs have learned the lesson that you can't time the venture capital market,” said Boughton. “We're seeing continued institutional engagement in asset classes that we haven't necessarily seen in past cycles. LPs aren't giving up, they're just being more selective about who they back and backing them in the right way.”
The fundraise is indicative of how LPs are thinking about the key late-stage market. They may be choosing to back secondary vehicles over traditional later-stage or growth-focused funds because of price. Median late-stage valuations have actually risen since initially dropping as the market cooled in 2022, according to PitchBook data. Meanwhile, many secondaries deals are still trading at discounts, according to data from Caplight, a secondary deal tracking platform.
The close of this fund and what it indicates about LP interest in later-stage startups and venture secondaries should be good news for VCs, as many are seeking liquidity in a still-quiet exit market, with investors and startups wanting to sell shares but not all investors are able to buy.
Venture firms can only hold up to 20% of their portfolios in secondaries shares, per SEC requirements, unless they're a registered investment adviser, meaning there aren't many buyers for these secondaries shares outside of secondaries-only funds, hedge funds and crossover investors like Fidelity and T. Rowe Price.
Boughton said $3.3 billion is actually a small amount given the potential size of the venture secondaries market, which continues to grow as startups stay private longer.
“Although we have the largest fund, we believe it is still small relative to the market opportunity that is in front of us,” Boughton said. “This allows us to be very selective about what we select and trade.”
Venture secondaries activity has increased this year compared to last year: Capright co-founder and CEO Javier Avalos told TechCrunch that his company's platform has tracked $600 million in deal volume so far this year, which represents a 50% increase compared to annual activity for the same period in 2023.
“It's encouraging that the increase in deal volume comes from both an increase in the number of deals closed and an increase in average deal size,” Avalos told TechCrunch via email. “The average closed size of secondary deals we observed in Q2 2023 was $1 million. Closed deal size has nearly doubled this quarter, indicating that more institutional buyers are active in the market. These funds typically participate in larger deals than retail investors.”
If LPs continue to show increased interest in the venture secondaries market and deal volume continues to grow, Borton may be right that while StepStone's $3.3 billion fund is currently the largest, there is room in the market for more funds of that size and above. StepStone's fund may not remain the largest for much longer.