What StepStone's $3.3B venture secondaries fund tells us about LPs' current appetite for venture

StepStone raised the largest fund dedicated to investing in venture secondaries ever, the firm announced last week. This fundraise doesn’t just say a lot about StepStone’s venture secondaries investing prowess, but also about how LPs are thinking about the current venture market.

The fund, StepStone VC Secondaries Fund VI, raised $3.3 billion. This marks a big step up from the fund’s predecessor, which closed on $2.6 billion, a record size at the time, in 2022. Fund VI was raised from both existing and new LPs and was oversubscribed, according to StepStone.

Secondaries funds like StepStone’s buy existing investor equity stakes in both individual startups, known as direct secondaries, and LP stakes in venture funds. Direct secondaries allow LPs access to startup stakes in already successful companies nearing an exit, which means less risk and less time to reward.

This record-setting fund comes at a time when venture fundraising is down sharply. In 2023, venture funds raised $66.9 billion, according to PitchBook data. That marks a 61% decrease from 2022 when funds closed on a record-breaking $172.8 billion.

While the negative overall venture fundraising numbers may imply that LPs are less interested in investing in startups, Brian Borton, a VC and growth equity partner at StepStone, told TechCrunch he doesn’t think that’s necessarily true. He thinks LPs are still just as interested, but after the wild valuations of 2020 and 2021, many of which have evaporated now, they are looking for venture strategies that return results faster and with less risk.

“LPs’ interest level in venture capital continues to be strong,” Borton said. “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.”

He added LPs are looking for ways to invest in venture-backed companies without as long of a holding period too. VCs, especially those that invest at the early stages, hold investments the longest of any private asset class.

“A lot of LPs learned the lesson that you can’t time the venture capital market,” Borton said. “There continues to be this institutional commitment to the asset class that we haven’t necessarily seen in past cycles. LPs aren’t throwing in the towel, they are just being more selective in who they are backing and making sure they are doing it in the right way.”

This fundraise also shows what LPs are thinking about the primary late-stage market too. LPs may be choosing to back a secondaries vehicle over a traditional late-stage or growth-stage focused fund because of price. Median late-stage valuations actually have risen since their initial decline when the market cooled in 2022, according to PitchBook data. Meanwhile, many secondaries deals still trade at a discount, according to data from secondaries deal tracking platform Caplight.

This fund close, and what it says about LP interest in late-stage startups and venture secondaries, should be good news to VCs. Many VCs are looking for liquidity in a still quiet exit market and while investors and startups want to sell stakes not every investor is allowed to buy.

Venture firms, unless they are registered investment advisors, can only hold up to 20% of their portfolio in secondary stakes, per SEC requirements. This means that there aren’t a ton of buyers for these secondary stakes outside of dedicated secondaries funds, hedge funds and crossover investors like Fidelity and T. Rowe Price.

Borton said that $3.3 billion is actually a small fund when you look at the potential size of the venture secondaries market, which continues to grow as startups continue to stay private for longer.

“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 to be very selective in what we choose and transact on.”

Venture secondaries activity is up this year compared to last. Javier Avalos, the co-founder and CEO of Caplight, told TechCrunch that its platform has tracked $600 million of transaction volume so far this year, which represents a 50% increase over yearly activity at this time in 2023.

“What’s encouraging is that the pickup in volume is coming from both an increase in the number of trades closed and an increase in the average trade size,” Avalos told TechCrunch over email. “In Q2 of 2023, the average closed secondary trade size we observed was $1 million. We’ve seen almost double the closed trade size this quarter, indicating more institutional investor buyers are active in the market, as these funds typically participate in larger deals than individual investors would.”

If LPs are increasingly interested in the venture secondaries space, and trading volume continues to increase, Borton might be right that while StepStone’s $3.3 billion fund is the largest now, the market has room for more funds of that size or greater. StepStone’s fund may not be the largest fund for long.