Industry Ventures has closed its latest hybrid strategy fund with a partial focus on LP-led VC secondaries as interest in the asset class ticks up.
The San Francisco-based venture and direct secondaries investor has raised $900 million for Industry Ventures Partnership Holding VII, a hybrid fund backing emerging managers through primary and secondary fund investments, as well as direct investments.
About 80 percent of commitments in Fund VII will be dedicated to primary and direct investments in emerging seed- and early-stage funds, while the remaining 20 percent will be used for LP-led secondaries opportunities in the space, according to Roland Reynolds, senior managing director at Industry Ventures.
Fund VII is separate from the firm’s dedicated secondaries vehicles, which invest in “profitable companies that are poised for exit”, Reynolds told Secondaries Investor. Its secondaries vehicles generally invest in companies with $20 million-$200 million in revenue. The hybrid strategy, on the other hand, is focused on earlier-stage funds that have less than $250 million in assets, Reynolds said.
Industry Ventures doesn’t invest in emerging managers via its dedicated secondaries strategies because backing early-stage funds requires a different mindset, according to Reynolds.
“You [need to] ultimately have faith in the manager and trust in their unique ability to make good follow-on decisions,” he said. “You do both bottoms-up of secondaries underwriting plus manager analysis. It’s just a different skill set.”
Fund VII is oversubscribed and brings the firm’s total AUM to over $8 billion, with $2.3 billion dedicated to early-stage hybrid funds, according to a statement about the fund close.
The VC secondaries market has become top of mind for stakeholders across the venture capital ecosystem with LPs in venture funds increasingly asking for liquidity and companies staying private longer, as affiliate title Venture Capital Journal reported Monday. New and existing secondaries firms are raising record amounts to serve the market, including StepStone Group which said in June it had raised $3.3 billion for its sixth venture capital secondaries fund, above its $2.6 billion target.
Secondaries investments were the most active component in the firm’s hybrid strategy last year given LPs’ need to address overallocation to private markets, Reynolds said. Despite that, the firm did not see much discount in its venture secondaries investments because most of the funds are young and did not experience the overpriced rounds in 2019 and 2020, he added. In addition, the firm does not consider discount a great factor in the secondaries investment process.
“Upfront discount is nice to helping with J-curve mitigation and to shortening the duration of cashflows. But what we’ve seen historically… [is that] greater return we’ll get as a buyer will come from the appreciation of the portfolio, not the upfront discount,” he said. “In the end, we are buying fundamentally good managers and portfolios.”
Industry Venture has made more than 725 LP interest investments and 290 direct investments since inception in 2000, according to the statement.
– Ryan Hibbison contributed to this report.