European venture capital has been undergoing a reappraisal in recent months. Last month, Private Equity International reported on research by software company eFront, arguing that the seemingly superior performance of US VC funds compared with those from Europe may be largely down to differences in measurement.
“Institutional investors who ignore European VC may well be missing out,” the report concluded.
Investors have often cited a lack of big exits as a reason to avoid European VC. But the successful April listing of music streaming service Spotify, which valued the company at $26.5 billion and saw the share price jump 12.9 percent on its first day of trading, has led some to believe the market is entering a new phase.
There are signs this optimism has infected the secondaries market, too. In Greenhill’s 2018 outlook report the advisor noted general partners have been broadening their fund mandates to encompass non-buyout strategies. Venture capital stakes were the second most highly traded last year, accounting for 22 percent of the total.
In December, sister publication Secondaries Investor revealed Aberdeen Standard was mulling a VC secondaries fund to take advantage of a rise in the market and the large amount of net asset value left in European funds.
“On the dealflow side we see a big upturn in [European] VC assets being offered on the secondaries market,” says Marco Wulff, co-founder of Montana Capital Partners. “The reason, I think, is that valuations are high and companies are becoming more mature.”
The dealflow appears to be there, but who are the buyers? Are we seeing a new wave of private equity secondaries buyers entering the VC space, or is it still the preserve of specialists?
Alan Feld of Vintage Investment Partners, which invests in VC secondaries, has seen a clear increase in what he calls “tourist investors” looking to get a piece of a hot market. But he doesn’t believe there’s much space for newcomers unless they can offer genuine added value. Even some of the largest secondaries players lack the knowledge and network to be of use, in his view.
“Will they be there when the markets are less hot?” he asks. “Will they continue to support the companies with additional capital when needed? Companies are careful about who’s on their cap team. They want people who can add value to the company, who can put their hand in their pocket when needed, who understand that this is a marathon and not a sprint. It’s not just the highest value [that counts].”
Hans Swildens, founder of VC investor Industry Ventures, is similarly sceptical about non-specialists making the move across. Although the transactional aspect of VC secondaries is the same, very different analysis is required. The basic private equity yardsticks of cashflow, EBITDA and leverage are essentially redundant in the VC market; it’s much more about possessing intimate knowledge of the technology that drives portfolio companies.
“Just coming in to the market and buying venture capital at a discount doesn’t work a lot of the time, because 80 percent of the companies in these funds don’t make money,” he says. “If someone doesn’t know what they’re doing, they come in to the market, buy a load of stuff and after three or four years they realise they are losing money all over the place.”