Liquidity surge challenges secondaries in VC market

2013 was a good year for US venture capital: according to Cambridge Associates, its US VC index produced an annualised return of 27.9 percent, its highest for 15 years. And the positive momentum seems to have continued into this year, judging by the hype around companies like Uber (raised $1.2 billion at an $18.2 billion valuation) and AirBnB (raised about $450 million at a $10 billion valuation).

Interestingly, these two rounds were led by mutual fund giant Fidelity Investments and TPG respectively. For secondaries firms who specialise in providing liquidity to the venture capital market – like San Francisco-based Industry Ventures – this clearly changes the dynamic.

“We’ve seen a doubling of demand, with some big pools of capital entering the market,” CEO and founder Hans Swildens tells PEI. “So if you look at the volume of cash now being invested in growth companies like AirBnB and Uber, there’s a huge pool of capital to access.”

Companies looking to raise between $100 million and $1 billion would previously have had to tap the IPO markets, he says; now they can do it privately.

That’s creating a lot of liquidity. “Venture funds can sell out, or they’re seeing big mark-ups on their books – and that’s attracting more capital into the market.”
But while this is all good news for asset owners, it’s not necessarily good for secondaries firms. “Because the market’s so liquid, it’s also a bit trickier.

Prices are up, so it’s more difficult to buy. Owners might get early liquidity, or they might get distributions elsewhere that will solve their liquidity issues. So it’s a bit more challenging to invest in the right deals.”

Nonetheless, Swildens says his firm still has an extremely active pipeline – not least from end-of-life fund recaps, of which it’s doing about one a quarter. And it hasn’t lowered its return expectations to reflect the changing market. “Some people seem to think that if you’re going to invest money today, you need to adjust your IRR and multiple targets. I think when you start doing that, it’s typically a very bad sign.”