Stalled Venture Capital Funds Scramble to Find Cash for Impatient LPs

Venture capital has struggled to get back on its feet after a tough 2022. While fund-raising recovered 37% in this year’s first quarter versus 4Q2022, exits still lagged, by EY’s reckoning. So cash distributions to VC limited partner investors has have been curtailed.

As a result, some VC funds have taken to raising cash via selling stakes in their portfolio companies on secondary markets, according to PitchBook research.

Thus far, the research firm indicated in a report, this has seen only limited success, as buyers are only interested in taking a piece of the fund’s best assets, thus limiting the cash generated to ship to impatient limited partners. And the stakes that go to secondary investors are often sold at a discount to their value and could lead to marking down portfolios.

For newer VC funds, the ratio of distribution to paid-in capital, which measures how much money a fund returns to LPs compared to what they invested, has flagged. For instance, for funds that launched in 2016 and 2017, just 40% has been returned. The average prior to 2016 is 80%.

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LPs had “expected many companies to go public by now, but now it looks like it may be three or four more years until they can,” the report found. Initial public offerings are in the doldrums nowadays. According to an EY report, using Dealogic statistics, just 33 companies had an IPO in 1Q2023, only slightly better than the comparable 2022 period’s 28. Those results are tiny compared with showings in prior years.

Unfortunately, the steep discounts to sell in the secondary market, outside of a few star startups companies in the funds’ portfolios, are making the exercise hardly worth the trouble.

Too often, the Pitchbook report stated, “investors have no interest in buying secondary stakes in a whole bunch of companies, even if current backers would sell them at a more than 90% discount.” In the VC universe, secondary sales “activity is still limited to the top 50 to 100 names.”