Normal Catalyst, one among Silicon Valley’s largest capital corporations, is gearing as much as launch what’s referred to as a “continuation fund” price between $800 million and $1 billion, in line with an individual acquainted with the plans.
A continuation fund consists of a portion of stakes that the VC agency has in portfolio corporations. With round $25 billion in property beneath administration as of 2023, Normal Catalyst’s precise continuation fund portfolio composition continues to be being decided. Nevertheless, it should probably embody stakes in Stripe, Gusto and Circle, the particular person stated. The agency has just lately employed Jefferies as its secondary funding advisor.
As soon as the fund is established and buyers are discovered for it, Normal Catalyst’s authentic restricted companions can be supplied a selection: promote their shares and money out, making means for brand spanking new buyers, or keep invested within the continuation fund, a course of referred to as ‘rolling.’
Whereas personal fairness corporations have used continuation funds for a very long time, the mechanism has solely just lately grown in recognition with enterprise capitalists, largely due to the dearth of IPOs and slowdown in M&A exercise. This has pressured some giant enterprise capital corporations to faucet the secondary market to return capital to their restricted companions.
As an illustration, In July, Bloomberg reported that NEA offered stakes in 11 portfolio corporations, together with Databricks and Plaid, to secondary buyers who collectively paid $540 million for the property. Lightspeed can be now within the strategy of promoting a bunch of current corporations price as a lot as $1 billion to secondhand patrons.
Like NEA and Lightspeed, the Normal Catalyst continuation fund will include late-stage startups whose values have appreciated for the reason that agency first invested within the property.
Normal Catalyst didn’t reply to a request for remark.
The first advantage of a continuation fund, versus merely promoting the shares outright to a different purchaser in a secondary market transaction, is that it permits VCs to proceed to handle the shares, retaining any future upside of them. Continuation funds are additionally thought of extra founder pleasant than secondary gross sales of shares of particular person startups as a result of they don’t introduce new homeowners to a startups’ cap desk. The identical VC stays invested, albeit by way of a special fund.
VCs have been extra keen to promote within the secondary markets just lately as a result of some LPs are telling them that they may restrict their investments within the VC’s subsequent fund in the event that they don’t obtain no less than some money returns from their older investments.
Though continuation funds are typically a “win-win” for enterprise funds, they could possibly be a conundrum for sure restricted companions. Since secondaries promote at a considerable low cost to present valuations—usually 20% to 30% off present valuations—when promoting shares, restricted companions might not not solely be taking a haircut on current valuations but additionally strolling away from potential share worth development.
Nonetheless, one among Normal Catalyst’s restricted companions advised TechCrunch that, given the dearth of liquidity from enterprise capital investments, his pension fund will all the time elect to money in fairly than roll right into a continuation fund.
As for when this LP can be supplied this selection, the particular person didn’t say, and it isn’t attainable for TC to estimate. Continuation funds are advanced offers that may take six months to a 12 months to promote. These transactions may also fail completely. Final 12 months, Tiger World tried to promote a kind of a continuation fund referred to as a strip portfolio, which sells solely a portion of stakes in every firm. However it couldn’t discover a purchaser keen to pay a worth that the agency thought was honest, PitchBook reported.
When earlier this 12 months, Shasta Ventures requested its restricted companions to approve a continuation fund that was priced 35% off its carrying worth, the agency’s buyers voted towards the deal, Axios reported.
In April, Monetary Occasions reported that Normal Catalyst is nearing $6 billion in capital commitments for a brand new major fund.The brand new fund nonetheless hasn’t been introduced. When TechCrunch requested for extra data associated to its fundraising actions final week, the agency declined to remark.
