Secondary pricing is widely believed to be at historically high levels, judging by pricing information published by secondary market intermediaries for fund interests they have marketed. Greenhill Cogent notes that in the first half 2015, venture capital fund interests it marketed saw the biggest discounts, with average high bids of 82% NAV. Despite this figure being lower than the 95% NAV average for buyout stakes, it actually reflects an eight-year high for venture capital interests.
The discrepancy between what secondary market buyers are willing to pay for buyout and venture capital interests is likely to be motivated by the upside they see in the funds they are investing in. Following the burst of the dot-com bubble, all but a few venture capital managers struggled to generate impressive returns. However, as documented in the 2015 Preqin Global Private Equity & Venture Capital Report, there has been an improvement in terms of venture capital returns in recent years, with venture capital funds registering the highest one-year horizon IRR of all private equity strategies to June 2014. This would go some way to explaining why venture capital fund stakes have reached the aforementioned eight-year high price.
With average discounts of 18% and performance looking encouraging, what is the current investor appetite for buying venture capital fund stakes?
Preqin’s Secondary Market Monitor currently tracks 642 investors that are open to buying private equity fund interests on the secondary market. Of these investors, 214 (34%) have a preference for acquiring stakes in venture capital funds. Of these, 44% are private equity fund of funds managers, 15% are secondary fund of funds managers and 11% are public pension funds, with the remainder made up of a variety of other investor types. The table below outlines the 10 largest potential buyers of venture capital stakes on the secondary market by private equity assets under management.
As the primary market for venture capital investment matures, so will the secondary market. Should the performance of venture capital funds continue to improve over the coming years, appetite for fund interests is likely to increase. Consequently, we may not see such significant discounts, as sellers seek to drive a harder bargain. Regardless of the size of discounts available to venture capital stakes, it is clear there is a secondary market for them and plenty of capital available to facilitate transactions.