Last week, StepStone made headlines by raising the largest fund ever dedicated to venture secondaries, amassing a remarkable $3.3 billion. This milestone not only underscores StepStone’s expertise in venture secondaries but also offers insights into Limited Partners’ (LPs) evolving strategies in the venture market.

Record-Breaking Fund Amid Downturn

StepStone’s new fund, the StepStone VC Secondaries Fund VI, surpasses its predecessor, which closed at $2.6 billion in 2022, previously a record. Despite a venture fundraising decline—venture funds raised $66.9 billion in 2023, a 61% drop from 2022’s $172.8 billion—StepStone managed to attract both existing and new LPs, leading to an oversubscribed fund.

Venture secondaries funds acquire existing investor stakes in startups and LP stakes in venture funds. These investments offer LPs access to shares in mature startups nearing exits, thus reducing risk and wait time for returns. This strategy appears particularly appealing as LPs seek quicker, more secure returns amid market volatility.

Changing Dynamics of LP Investment Strategies

Brian Borton, a VC and growth equity partner at StepStone, suggests that LPs remain interested in venture capital despite the overall fundraising downturn. Borton believes that LPs, responding to the high valuations of 2020 and 2021 and their subsequent collapse, now prefer strategies that yield faster, more predictable results.

“LPs’ interest level in venture capital continues to be strong,” Borton told TechCrunch. “A lot of LPs are looking for broader or more differentiated ways of building their venture exposure and I think secondaries as a method of building that exposure certainly resonated.”

Borton emphasized that LPs are keen on reducing the long holding periods typical of early-stage venture investments. He noted that LPs are not abandoning venture capital but are becoming more discerning about their investments, seeking reliable strategies to mitigate risks.

Implications for the Late-Stage Market

The success of StepStone’s fund also reflects LPs’ perceptions of the primary late-stage market. While late-stage valuations have seen a modest increase since their post-2022 decline, many secondaries deals continue to trade at a discount, making them more attractive. This preference indicates a shift from traditional late-stage or growth-stage funds to secondary vehicles, driven by better pricing opportunities.

This trend is promising for VCs, many of whom are seeking liquidity in a sluggish exit market. However, SEC regulations limit venture firms to holding only up to 20% of their portfolio in secondary stakes, restricting the number of potential buyers to specialized secondaries funds, hedge funds, and crossover investors like Fidelity and T. Rowe Price.

Growing Market Potential

Despite its size, Borton considers the $3.3 billion fund relatively small compared to the expanding venture secondaries market. As startups remain private longer, the need for liquidity through secondary sales grows, highlighting significant market opportunities.

“We have the largest fund but we truly believe that is still undersized relative to the market opportunity in front of us,” Borton said. “This allows us to be very selective in what we choose and transact on.”

Supporting this view, Javier Avalos, CEO of Caplight, noted a 50% increase in venture secondaries activity this year. Caplight’s platform tracked $600 million in transaction volume so far, with larger average trade sizes, suggesting more institutional investors are engaging in the market.

Future Outlook

From my point of view, StepStone’s success in raising this substantial fund signals robust LP interest in venture secondaries as a viable investment strategy. The increased activity and trade sizes reflect growing confidence in this sector, indicating a shift towards more diversified and secure investment approaches.

As trading volumes rise and more institutional investors participate, it’s likely we will see additional large funds emerge, further solidifying venture secondaries as a critical component of the venture capital landscape. StepStone’s fund, while currently the largest, may soon be one among many as the market continues to mature and expand.