The Twenty Minute VC (20VC): Venture Capital | Startup Funding | The Pitch

20VC: Will LPs Pull Out of Existing Managers, How Will Fund Sizes Change Moving Forward, Is Now The Time to be Aggressive on Secondaries, What is the Discount on Secondaries Today, Who Will Win and Lose in the Next Five Years with Hunter Somerville, Partn

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Mar 3, 2023

Hunter Somerville, Partner at StepStone and seasoned venture capital expert, dives into the evolving landscape of secondary markets. He unpacks the three types of secondaries and discusses how the current economic climate is reshaping fund sizes and LP commitments. Somerville raises concerns about LPs potentially pulling out of existing managers, driven by the denominator effect. He also shares insights on the implications of venture capital valuations and emphasizes the need for strong GP-LP relationships in turbulent times.

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INSIGHT

Three Types of Secondaries

There are three types of secondary transactions: company secondaries, fund secondaries, and GP-led restructurings.
GP-led restructurings include strip sales, tender offers, which are variations on LP interest but at scale.

INSIGHT

Denominator Effect and Secondaries

The denominator effect occurs when public market assets decline faster than private ones, leading to over-allocation in private investments.
LPs may use secondaries to rebalance their portfolios if markdowns are insufficient.

ADVICE

Valuation Advice for Managers

Base markdown decisions on fair value, not LP preferences.
Consider runway and growth stage when assessing markdowns; be more aggressive with shorter runways and stalled growth.

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Hunter Somerville is a Partner @ Stepstone, one of the largest secondary buyers, fund investors and players in our ecosystem with over $600BN in capital responsibility and over $100BN AUM. Additionally, Hunter serves on the LP Advisory Boards for Felix Capital, Foundry Group, Imaginary Ventures, Scale Venture Partners, Boldstart Ventures, Ludlow Ventures, and more. Prior to StepStone, Hunter was a general partner with Greenspring Associates, a venture capital and growth equity investment firm that merged with StepStone in 2021. Before that, he worked as an associate for Camden Private Capital.

In Todays Episode with Hunter Somerville We Discuss:

1. Three Types of Secondaries:

What are the three different types of secondaries?
What is the current situation with company secondary opportunities today?
What is the current landscape for fund secondary opportunities today?
What are GP-led restructuring or strip sales? How do they work?

2. LPs Today and Moving Forward Investing in Funds:

Will we see a wave of LPs not commit to their existing managers?
What is the denominator effect and how does that impact LP deployment into funds?
What are the top 3 reasons why LPs will not re-commit to existing managers?
Do LPs feel VCs have fairly marked down their venture books in the last 6 months?
Does Hunter agree that if you have not returned cash to your LPs when you could have done ijn the last 5 years, then you are most in trouble?
Why does Hunter believe we will see more international LPs entering venture than ever before?

3. Liquidity: When Does the Cash Hit:

Why was liquidity so bad in 2022? How did that compare to 2021?
How does Hunter forecast liquidity environments in 2023? What could drive them?
How active were Stepstone in secondary buying over the last few years?
Is now the time to be greedy when others are fearful in secondaries?
What discount was Hunter seeing both on fund and company side secondaries in 20-22?
What is the current level of discount being applied to both company and fund secondaries?

4. AMA with One of the Largest Secondary Buyers:

Which LP class will be hurt the most from the last fund cycle?
What would Hunter most like to change about the world of venture?
What was Hunter's biggest mistake on a company investment?
What are the biggest mistakes LPs make when they do direct investing?
Why are big-name people entering firms as GPs not always a good sign?