Interview, Fireside Chat
Hunter Somerville: Biggest Mistake LPs Make; Deep Dive into Secondary Markets | 20VC #985
- Significant market improvement is projected to commence in 2024 and 2025, following a period in 2023 characterized by low secondary market activity and no step-change in liquidity.
- Fund valuations on the venture side are anticipated to see average markdowns of approximately 19%, with a range of 15% to 20%, as managers independently target companies with 18 to 24 months of runway.
- LP interests are expected to trade at discounts of 30% to 45%, while company secondaries are projected to discount between 20% and 35%, with a wider spread persisting due to the lack of IPO windows.
- Secondary markets are forecast to become more robust over the coming years, driven by increased GP-led restructuring activity in the second half of the current year and the following two, alongside a long-term shift where limited primary options make secondaries a significant liquidity mechanism.
- Endowments are expected to reduce commitments significantly due to liquidity constraints and the denominator effect, while growth funds face a reality where aggressive capital deployment is unviable due to a scarcity of opportunities.
- LPs are anticipated to prioritize DPI over TVPI, and in the context of growth funds, shift fee structures toward invested capital rather than committed capital to account for deployment uncertainty.
- Future fundraising is expected to align with actual capital needs for the next two to three years, resulting in smaller investment sizes for preferred managers and the removal of fringe investments from books.
- International capital participation, particularly from the UAE and India, is expected to rise in growth and venture sectors, though US market re-emphasis will persist while Latin America faces currency navigation challenges.
- Some managers may return up to 35% of capital to reduce fund sizes, while emerging groups face increased demand for management company positions (GP stakes) due to harder fundraising conditions.
- A generation of new LPs entering during the boom may hold negative sentiment toward the venture asset class, even as venture remains a critical long-term hold for job growth and R&D.
- Increased friction within management groups is expected between older GPs remaining in roles and younger GPs, and funds returning to market within six to nine months will face challenges regarding vintage diversification.
- The current period is projected to be the first in a decade where the true benefits of vintage diversification regarding pricing levels become evident, though massive valuation upticks similar to previous cycles are not anticipated in the near to medium term.