2024-01-29 04:01:26
1,200 venture capital funds. That’s the phenomenal number of venture capital funds that have been formed in the last decade, which has been one of the best for the technology sector. Hundreds of billions of dollars from more professional investors, as well as less professional ones, poured into these funds, which promised dream returns as long as the unicorn factory continued to gallop. 2021 and 2022 were years of record fundraising in the industry with more than 300 billion dollars, and the celebration did not miss the Israeli venture capital market either. However, now, after the change of direction in 2023, many would like to be repaid from their venture capital adventure and are not succeeding: valuation levels have fallen, new fundraising rounds have disappeared and there are no exits on the horizon.
“A trillion dollars are stuck in venture capital funds today,” says John Ayert, a partner in the investment fund StepStone VC, in an exclusive interview with “Calcalist”. “The investors in these funds are desperate for liquidity and want their money, or at least part of it, back. We see many pension funds that have entered into the adventure of venture capital and also quite a few family office entities, which manage the assets of wealthy clients, who are looking for the so-called in the U.S. Take at least some of the chips off the table.”
And this is exactly what Scandari funds are doing, which have been picking up speed recently all over the world, and are expanding their presence in Israel as well. Stepstone representatives, who until now have been involved in investments in Israel, are currently holding meetings (road shows) with institutions in Israel led by Leader Private Equity as part of the raising of its sixth fund, for which it aims to raise 3 billion dollars, an amount for most of which it has already received commitments. In Israel, beyond institutions, Stepstone also addresses qualified investors. The target market – those $1.3 trillion of unrealized assets sitting in venture capital funds raised between 2010 and 2018, according to data from the research company PREQIN.
Stepstone is not the only actress who wants a bite from this fat pit, and only in the last few months the Sunvest Capital Partners fund, which was recruited by Fiona Darmon and Meriv Weinriv, two veteran players in the Israeli venture capital, also began to operate in it. Dermon was a partner in the JVP fund and Weinreeve managed the Qualcomm investment fund. The venture capital arm of Stepstone, which is behind a body that manages assets of 140 billion dollars in all its activities, manages 25 billion dollars in secondary funds, which are intended for the purchase of holdings from venture capital funds as well as shares from employees of high-tech companies. In recent years, Stepstone has already carried out several transactions in Israel, including the purchase of holdings in the fourth fund of the Israeli venture capital fund Vertex for $150 million, and a month ago it purchased a share of the third fund of Group 11. Stepstone refuses to disclose the yield of its secondary fund, but its latest fund is rated Ranked #1 in terms of performance by both Pitchbook and PREQIN.
“The current situation in the markets is the perfect storm for us and we think that the situation will remain like this at least throughout 2024, but with a high probability also in the future,” says Airt, “We do most of our transactions in a bear market, but in 2009, for example, after the great financial crisis, The gaps between demand and supply were so large that it was difficult to impossible to make deals, and today it is different. Investors may have expected returns of 7x or 5x in venture capital, but today they are willing to liquidate part of their investment even for a return of only 2x. Investors understand Today, a great deal of the profits are on paper, so if they wait even longer, they may not see the money at all. According to the models of pension funds or other institutional entities, they were supposed to receive returns from the realization of investments in the fund every year, and this is not the case. At the same time, despite the disappointment On the side of the investors, the venture capital managers want to raise new funds, but if their potential investors are still stuck in the previous funds and are not liquid, sometimes not even particularly happy with the investment, they have nothing to invest in the new fund,” Aviert carefully articulates the frustration that has been building among venture capital investors in the past two years . The perfect storm he is talking about was created by the fact that, on the one hand, the waiting time until an IPO has doubled in recent years to 10 years, compared to 5 years before the 2008 crisis, while on the other hand, venture capital funds return to their investors more often – every two years, compared to four years previously.
The business model of Stepstone’s type of funds is based on the frustration of stuck investors. The Fund offers both LP and GP to sell their shares in companies in which the Fund has invested at a certain discount to their latest valuation. Stepstone mainly appeals to funds that specialize in relatively early investment stages that made the first investments a long time ago, but did not have time to realize the holdings. These funds are sometimes stuck with companies that are listed at a very high value, male from 2021, so they are not expected to exit at a higher value in the foreseeable future. Thus, for example, in Stepstone’s recent transactions in Israel, it purchased at a discount stakes in companies, including Next Insurance, Yotfo, Navon, Tifalti, Verbit and Axonius. According to data from the investment bank Jefferies, which Eiert cites enthusiastically, the average discount today in secondary transactions is 30% on the value recorded in the fund’s books, but there are also cases of a deeper discount. “If the fund manager does not value his holdings from the aggressive pricing of 2021, then a 30% discount is not a good deal from our point of view, it will be really expensive, but on the other hand there are managers we work with who have already reduced the valuations by 50% compared to the peak, and there We also feel comfortable with a 10% discount,” explains Airt. “A lot depends on the quality of the companies in the portfolio and the potential of what can be done with them in the future, when the options are a sale to an investment fund later, a sale to a strategic buyer and also an IPO, as the market opens up. We like to delete the worst companies at the very beginning, so that they don’t remain in the portfolio.”
Sometimes it also works in the opposite direction, as in the case of Tiger Global, which was the most active investor in high-tech in 2021, including in Israel, and found out the hard way that it is not a great expert in venture capital. Tiger Global, a hedge fund in its original occupation, realized that it would not be able to realize quickly, if at all, the inflated portfolio it had built up in the boom years, and in recent months it has been looking for buyers for its holdings in companies. “The case of Tiger Global and other investors of its type creates a new growing market for us, when the purchase is not of a portfolio, but of large stakes in certain companies in which we recognize potential,” Airt points out, “this joins the activity of note in the past year in the secondary market of former employees in high-tech companies, The founders and the angels. Until 2022, the pricing of these shares was dictated by the demand side, so they were done at the same time as capital raisings and at the same value; today the best companies don’t want to raise new rounds, but private individuals do want liquidity and you can negotiate with them without related to the previous value of the company”.
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