When German investor and entrepreneur Lukasz Gadowski had something he wanted to sell, he did what many people would: post it on social media.
Only he wasn’t getting rid of an old chair or last year’s coat. He was selling a stake in a VC firm — 468 Capital — worth a few million dollars.
Gadowski tells Sifted that he was pleased with the fund’s “good performance”, but he’s interested in backing hardware and 468 only does software. After posting on LinkedIn, he says he quickly found a buyer that 468 was happy to have on board — and was even able to sell his stake at a premium.
Sales of stakes in VC funds — known as secondaries — have picked up this year in Europe, VCs and their investors, limited partners (LPs), say. The reasons? Some LPs — who could be anyone from individuals like Gadowski to multinational hedge funds — hit by a decline in the price of other assets they own, might want to take some cash off the table. Or they might have their own personal reasons to sell.
And amid a dearth of exit opportunities, VCs are looking for a way to return some cash to their investors. “Given market conditions as of late, we have seen an influx of exciting secondary opportunities, especially those for relatively smaller tickets,” says Mauro Yovane, partner at Axon Partners Group, a fund-of-funds investing in European VC.
These kinds of transactions have always been more common in private equity — and more prevalent in the US. But the fact that they’re happening more in Europe is yet another signal VC on the continent is maturing, investors say.
More 'for sale' signs
So why now? Market participants say some LPs are looking to wind down VC positions because their stock portfolios have been hit by the global equity rout. As holdings in publicly listed companies have dropped in value, the share of VC as a percentage of their portfolio has been pushed up — and they want to rebalance.
VC general partners (GPs) might also be looking to return some cash to LPs as they prepare for another fund.
At the same time, more stringent banking regulations in Europe — which come into force from 2025 — might push some financial institutions to decrease their holdings of VC funds — a risky asset class.
For buyers, transactions can be tough. Unlike the more common kind of secondary in the startup sector — direct secondary transactions, involving a stake in just one company — buyers of a stake in a VC fund have to crunch the numbers on a whole portfolio and decide on a price. Buyers are usually able to acquire these stakes at a discount of anything from 15% to a huge 60% on the NAV (net asset value), according to investors.
Despite those eye-watering discounts, Chris Wade, partner at Isomer Capital, a firm that has been a buyer in numerous secondary fund transactions, is quick to explain that “this is not ‘vulture capitalism,’ this is not us saying, ‘Oh, I think I can get some sort of discount.’”
“We think it’s our job to provide liquidity. The biggest discount we’ve ever given in a transaction that went ahead, the LPs who we bought from were getting 2.5x on something they’d held for 18 months.”
Ameer Awadiyeh, VP of investments at fund-of-funds AlphaQ VC in Munich, says purchasing secondary stakes is part of AlphaQ’s strategy to make sure it can return some cash sooner to investors than if it purely invested in new funds.
Buyers and sellers can finally agree on a price
Another reason transactions are happening more frequently is because it’s easier to decide on a price.
“Last year we saw a lot of activity, at least on the dealflow side for LP secondaries. We evaluated roughly 20 LP secondary opportunities,” says AlphaQ’s Awadiyeh.
But given that, at that time, VCs hadn’t written down the value of their portfolio holdings despite a stock downturn, “transactions didn’t happen”. Now, he says, that’s changing.
“We have always had visibility on secondary offerings in European VC, and valuations as well as discounts offered during 2021-22 were not appealing,” says Axon Partners Group’s Yovane.
He says that since Q3 2022, the team has seen the net value of VC portfolios corrected down about 30%, and they were finally able to negotiate two secondary transactions in Q4 with over 40% discounts.
Europe has a ways to go
VC fund secondaries aren’t likely to become commonplace anytime soon, though. There’s still a lot of stigma in Europe when LPs want to sell a stake — even if it has nothing to do with the LP’s satisfaction with performance.
“To quote one great GP in Europe: ‘Why would anybody sell my great fund?’,” says Michel Geolier, cofounder of SaaS platform Betterfront, which this month launched a new marketplace to match buyers and sellers of fund stakes from $100k to $10m. “We still have some work to do to make [VCs] understand it’s not about you, it’s about the LP. I think the US will get there faster.”
He holds up the case of Gadowski to stress that most of the time LPs are looking to sell not because they’re unhappy with performance, but because of other strategic considerations.
That said, many LPs don’t want to take whole stakes in funds off the table and prefer to cash out of specific companies.
“Most clients started investing in VC funds relatively recently and saw them as decade-long commitments. So there is little interest in selling their stakes here,” says Ahmed Husain, head of family offices, EMEA, at investment management firm Neuberger Berman. “More often we see secondary sales of positions in companies where a [family office] had been an early investor and is now looking to take some chips off the table where a $500k investment may have grown to $20-30m.”
But with portfolio company exits far off, necessity might be the mother of invention.
“VC secondaries have been less prevalent in comparison to PE secondaries, which have attracted capital and awareness,” says Pitchbook analyst Nalin Patel, lead EMEA private capital analyst.
“With the blurring of the lines between VC and PE in recent years, and lack of exit options due to near-term market conditions in recent quarters, opportunities for VC secondaries could increase.”
