- Insights This article was written by a TIA community member. Insights pieces undergo the same rigorous editorial process that newsroom-produced articles have.
Alexandre Covello · · 7 min readVC secondaries: an underused tool in funding crunch
This story was republished with permission from The Realistic Optimist, a paid newsletter covering the global startup scene. It was moderately edited to reflect Tech in Asia’s editorial guidelines.
Global venture capital is suffering from a hangover from the whirlwind of euphoric raising and investing of 2020 and 2021. Southeast Asia is no exception, as Tech in Asia data shows a dramatic dip in capital raised, from US$13.8 billion in the third quarter of 2021 to US$1.1 billion in Q2 of this year.
As geopolitical tensions and inflation have caused interest rates to rise, many limited partners (LPs) are less inclined to invest. After all, why take a risk on a startup when you can lend out your money for a 5% or better interest rate?
Image credit: Timmy Loen
In addition, VCs are also realizing that many of their 2021 investments were overvalued. Not only do they need to mark down valuations, but the tech sector’s liquidity drought means exit options are scarce, giving VCs a hard time providing returns to their LPs.
One possible solution that hasn’t received enough attention in my opinion is VC secondaries. By borrowing a little from the private equity playbook, VCs could start to address the funding winter and liquidity crunch. Let’s dive in.
Historical parallels
Before understanding venture capital secondaries, you have to grasp the private equity (PE) version.
Following the 2008 financial crisis, underperforming private equity general partners (GPs) found themselves in a pickle. Their portfolios were underperforming and their LPs were nervous about their return on investment, which made it difficult for general partners to raise money.
See also: How VCs can beat currency depreciation
Some GPs came up with an idea: carve out their portfolio’s best performers into a new, “continuation” fund, while selling the rest of the portfolio. Those sales returned some money to LPs, who could then either buy into the new continuation fund or call it a day.
The general partner, armed with a sexier fund and a sexier pitch, could also hunt for new LPs.
Soon enough, the idea grew in popularity and even more GPs started doing it as well. This particular type of private equity secondary is known as “GP-led.”
Image credit: Timmy Loen
Rinse and repeat
LP stakes
NAV financing
Companies shares trading
Tepid environment
Stay ahead in Asia’s tech landscape
This is premium content. Subscribe to read the full story.
By borrowing from the playbook private equity used after the 2008 financial crisis, VCs could unlock an alternative way to raise more liquidity.
We know this is not ideal. ⌛ Sign up in 20 seconds. Cancel anytime.
Our subscriber community includes professionals from these companies:
Stay updated on the go with our mobile app.
Get latest insights with smoother, more personalized experience through TIA mobile app.
