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AGM Alts Weekly | 6.4.23
AGM Alts Weekly #4: Making private markets more public, every week.
👋 Hi, I’m Michael and welcome to my weekly newsletter, the AGM Alts Weekly. Every Sunday, I cover news, trends, and insights on the continuing evolution and innovation in private markets. I share relevant news articles, commentary, an Index of publicly traded alternative asset managers, job openings at private markets firms, and recent podcasts and thought pieces from Alt Goes Mainstream.
Join us to understand what’s going on in alts so you and your firm can stay up to date on the latest trends and navigate this rapidly changing landscape.
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Good morning from Berlin, where I’m in town for SuperVenture, the European VC and LP conference, to speak and meet with companies and funds. I’m writing to you after a night at Olympiastadion Berlin, where, along with Filip Dames from Cherry Ventures and Levent Altunel from bunch (picture below), we watched Mario Gotze of Eintracht Frankfurt and Companion-M play in the DFB Pokalfinale.
Many of you may know Mario as a prolific footballer. He scored the World Cup winning goal for Germany in 2014 and has forged an impressive career playing for many of the Bundesliga’s top clubs at Dortmund, Bayern Munich, and Eintracht Frankfurt. But he’s equally impressive off the pitch. He’s an active investor through his investment vehicle, Companion-M, in both a number of Europe’s most exciting startups and top funds such as Cherry Ventures, EQT, Warburg Pincus, Lakestar, Project A, and more. So I thought this theme would be a fitting way to kick off this week’s newsletter as Mario (and sports) is a microcosm for many of the themes occurring in the private markets that Alt Goes Mainstream has highlighted since 2020, namely the collision of culture / sport and finance (here and here), the continued rise of European venture (here and here), and how LPs can help fund managers and their companies just like VCs help their founders. Mario’s work in the startup world covers all of these themes — he’s as deftly navigated the startup ecosystem and worked to understand the players just as he would navigate the pitch and dribble through the opposing defense.
AGM has created an Index to track the leading publicly traded alternative asset managers.
Some of the industry’s largest alternative asset managers are publicly traded — and their net inflows can serve as a window into how private markets are being perceived by investors and allocators who are allocating capital into alternative investments.
AGM News of the Week
Articles we are reading
📝 a16z to Launch VC Fund of Funds: Will fund-of-funds open the door to early-stage deals? | Leah Hodgson, Pitchbook
💡$35B AUM VC fund platform Andreessen Horowitz is reportedly in the process of launching a VC fund-of-funds in a bid to give the firm continued access to startups at the earliest stages. The past few years have seen a marked rise in emerging managers and micro VCs focused on Seed stage, where smaller fund sizes can result in outperformance as the size and scale of outcomes gets larger. Both LPs and GPs have been looking for ways to gain increased exposure to Seed markets. LPs such as Greenspring / StepStone and Cendana in the US and Isomer and Equation in Europe, amongst many others, have created dedicated micro / emerging VC programs. GPs such as a16z, Bain Capital Ventures, Tiger Global, and others have invested into Seed VC funds either through their funds or as GPs to gain exposure. VC fund of funds strategies, particularly for Seed and emerging managers, have shown strong performance, according to Pitchbook data.
AGM’s 2/20: As VC fund platforms continue to grow in size and scale, larger funds are looking to find ways to gain continued exposure to the Seed market, which appears to have maintained its popularity in a more muted growth investing environment. The strategy of larger VC funds trying to gain exposure to the Seed market via investing into Seed-focused fund managers or solo GPs / micro funds is not new — many VCs have been doing this either via personal investments outside of their funds or, in crypto, a number of funds invested into crypto funds, such as USV. This strategy can make sense at Seed stage, where it can be challenging to cover the entire market or find the best companies at the earliest stages or geographies. If the goal is to canvas as much of the market as possible and provide as many chances at exposure to the top companies from seed stage, a FoF strategy can make sense for LPs. a16z’s foray into Seed in an institutional manner highlights a few interesting trends in the business building of VC asset managers — (1) it could be representative of more VC funds expanding horizontally to offer different investment products to their LPs and to give themselves more coverage of the universe of startups from seed to scale and (2) it could signal that VC is in the midst of a similar evolution to private equity at the larger end of the VC fund spectrum, where the largest VC asset managers evolve into platforms that have multiple investment products across different stages and strategies (Seed, Early, Growth, Late-Stage, even public markets, and direct investments, fund of funds, and possibly even private credit). One interesting question from this trend of VC funds launching their own fund of fund strategies — will they then be competing with their own LPs (fund of funds) for allocations into emerging managers and will their LPs still continue to allocate to their direct funds? My gut tells me yes, as the current FoF’s mandate is to gain access to the top VC funds, but this bears watching.
📝 What’s in store for private equity distributions in 2023 | Blazej Kupec, Victoria James, Moonfare
💡Private equity distributions in 2023 are expected to be slower due to market conditions. Different strategies have varying distribution profiles, with the pace of distributions hinging heavily on the macro environment. GP-led deals offer an alternative route for distributions. Private equity historically outperforms public markets, especially in recessions. Distribution timelines vary across strategies, with private credit funds being more predictable, venture capital having a more pronounced J-curve, and real asset funds having extended cycles. Funds of funds and secondaries have their own distribution characteristics, with secondaries having a reduced J-curve and a big market opportunity in the current environment. Secondaries are gaining popularity for their liquidity benefits and attractive economics in the current environment.
AGM’s 2/20: This commentary from Moonfare tracks with market sentiment and investor interest. Secondaries (as discussed below in the article about Adams Street secondaries fund) is proving popular in the current market, while VC and PE are facing more fundraising headwinds. Private credit is also popular in the current environment, although questions remain about risks with credit quality of underlying assets in the current market.
📝 QED Investors says pace of investing from new funds will be “extremely disciplined” | Mary Ann Azevedo, Christine Hall TechCrunch
💡QED Investors has raised $925 million across two funds—an early-stage fund of $650 million and a growth-stage fund of $275 million. The firm focuses on fintech investments and plans to support companies at different stages. QED is bullish on embedded finance, counter-cyclical businesses, blockchain technologies, insurtech, and proptech. QED has long been a believer in fintech innovation in emerging markets like Latin America, Africa, India, and Southeast Asia, and believes that these regions are in the earliest chapters of fintech innovation. QED plans to make 35-45 investments with an average check size of $15 million out of Fund VIII.
AGM’s 2/20: QED’s large fundraise proves that there’s still LP interest in venture — and that high-quality funds that have performed in the past will still be able to attract capital in spite of the current fundraising environment. QED’s evolution also mirrors that of fintech’s evolution. Just 10 years ago, fintech was a sector of the startup world that only saw a few $ billion flow into the entire space annually. Now a single fund like QED is able to raise almost $1B to deploy into fintech companies globally. This signals both the maturation of an industry as well as the excitement that LPs have for continued fintech innovation. QED Co-Founder and Managing Partner Nigel Morris believes North America and Europe will continue to progress with fintech innovation, but also notes that there’s a potential to build “world-class transformational companies” across emerging economies in APAC, MENA, and LatAm, where larger numbers of people remain un- and underbanked. Congrats Nigel and team on your continued success and look forward to seeing how QED continues to evolve over the years.
📝 There’s No Easy Exit for Companies Backed by PE and VC | Michelle Celarier, Institutional Investor
💡The health of private equity and venture capital-backed companies is raising concerns as rising debt costs, compressed margins and negative cash flow paint a worrying picture. The analysis of a subset of companies owned by private equity and venture capital firms revealed they were unprofitable, cash flow negative and heavily leveraged. The companies were also found to trade at a premium to public markets, with margins significantly lower than S&P 500 companies. The report from Verdad Advisors suggests that the increase in debt is not yet fully reflected in reported numbers, and multiple compression upon exit seems likely for many deals. Despite these challenges, private equity remains a favored asset class among investors.
AGM’s 2/20: Gone are the days of companies with poor metrics and unit economics. Companies will need to prove a profile of financial health in order to attract growth, late-stage, and IPO investors — and have the revenue scale, and ideally, profits to boot. Bessemer came out with a 2022 report, coining the coming years as “The Age of the Centaur” that features cloud businesses that reach $100M ARR. This mindset shift is a healthy, if not sobering, one. At the time that Bessemer’s Mary D’Onofrio and Adam Fisher penned a TechCrunch article on this topic in 2022, there were over 1,000 unicorn ($1B+ valuation) companies. But at an average entry ARR multiple of 34x in 2021 for cloud companies, that meant a company only had to have $29M in ARR to achieve unicorn status. Achieving $100M ARR is no easy feat — it takes time and consistency to reach that milestone. The Verdad report paints a sobering picture of the metrics of companies in private markets and is representative of the current times — that metrics do matter.
📝 Adams Street $3.2B fund signals confidence in secondaries | Jessica Hamlin, Pitchbook
💡$54B AUM alternative asset manager Adams Street recently closed on a $3.2B secondaries fund, its 7th secondaries vehicle. This fund is 50% larger than its predecessor, signaling strong LP demand for secondaries strategies in the current market. While fundraising has slowed in most corners of private markets, secondaries have proven to be a popular strategy for LPs.
AGM’s 2/20: Different market environments call for LP demand in different investment strategies. Secondaries appear to be having their time in the sun as many structural features and supply/demand imbalance of the current market make for an attractive market opportunity for secondaries funds. Institutional allocators’ facing the impacts of the denominator effect from a decline in public market performance has led to LPs looking to rebalance portfolios. GPs are also feeling the need to generate liquidity, so there’s been an uptick in high-quality, GP-led transactions larger than $1B. Secondaries strategies also have features that are attractive to LPs, particularly in the wealth channel, where many newer entrants to private markets are looking for shorter fund lives and increased liquidity. Secondaries, which have a reduced J-curve, a path to near-term liquidity, and attractive economics due to market dislocation, are representative of this opportunity.
📝 Why One Endowment is Taking an Unorthodox Approach to Hedge Funds | Alicia McElhaney, Institutional Investor
💡Texas Tech University’s endowment is employing a specific strategy to ensure that it won’t suffer from liquidity issues while still maintaining exposure to private markets strategies. The $1.7B university endowment runs a low beta book in the hedge fund and credit portions of its asset allocation and has partnered with a bank to limit its liquidity risk. In exchange for a fee, Texas Tech transferred its hedge fund investments to a bank, which holds those investments on its behalf. The bank provided cash in exchange for these investments and has become a limited partner to the hedge fund firms in Texas Tech’s place. When the hedge funds generate returns during the time when the bank is the investor of record, Texas Tech profits. When the hedge funds post losses, the endowment covers them.
AGM’s 2/20: Texas Tech’s investment strategy is representative of a broader theme in private markets — managing liquidity risk and dealing with the denominator effect. Many institutional investors have large — or growing — exposure to private markets. That can help drive returns and reduce volatility, but it also can come with a consequence. That consequence is lower levels of liquidity. The remedy for illiquidity is generally the secondary market, but Texas Tech has come up with a different strategy via a financing trade with a bank, to achieve this outcome.
Reports we are reading
📝 From London to Tallinn, ‘Founder Factories’ Enhance Robust European Venture Ecosystem | Ross Morrison, Calum Peterson, Adams Street Partners
💡Europe's VC ecosystem is thriving, with over 1,000 start-ups founded by entrepreneurs from European and Israeli VC-backed unicorns. 2021 saw record investment and the rise of more than 340 unicorns. The diverse European market has numerous innovation hubs, and experienced venture managers are crucial for success. With funds having plenty of dry powder, attractive valuations, and a robust start-up pipeline, 2023 and 2024 are expected to be fruitful years. Local presence and selective manager choice are vital for optimal exposure. Adams Street, a fund of funds and co-investment platform, predicts continued growth, nurturing future entrepreneurial talent in Europe.
AGM’s 2/20: We may be over 250 years past the dawn of the Industrial Revolution, but Europe’s startup factories are in the age of maximum production. Europe’s “founder factories” are churning out second and third time founders. Adams Street finds that over 1,000 startups have been founded by entrepreneurs who had prior experience at European and Israeli venture-backed unicorns. One of the reasons that we are so excited about the European tech ecosystem is because it’s clear that the talent is there at first-generation, and now second-generation, startup success stories. Market dynamics suggest that Europe should continue to grow into a thriving startup ecosystem for founders and funds.
Interviews we are watching
🎥 From $1 to $100m revenue: Scaling VC backed SaaS with Notion Capital | Stephen Millard, Notion Capital
💡This Notion Capital webinar explores the journey of building a successful SaaS company and highlights the discontinuity and challenges faced at different stages. The critical milestone for VC-backed SaaS companies is reaching $100 million in revenue within ten years. However, this is no easy feat — the probability of achieving this milestone is approximately 1 in 100. The numbers from Notion’s dataset are staggering:
117,566 SaaS and Cloud Tech companies were founded globally
37,327 of those companies founded are (or were) VC-backed; and
13,789 of those raised more than $3m.
243 of those (1.8%) had either achieved $100m ARR and / or been acquired and / or listed, equivalent to 1.8%, or approximately one in 50.
The majority of companies that achieve $100 million in revenue do so in less than ten years, but the probability seems to decrease thereafter. Millard identifies common revenue milestones where companies often get stuck, with Notion finding that the $2.5-10M ARR mark being an underappreciated stumbling block for SaaS companies. Openview’s Kyle Poyar attributes this to “when companies are shifting from founder selling to a more formalized GTM motion and they risk either (a) going after the wrong target customer, (b) picking the wrong GTM playbook, or (c) hiring the wrong team to accomplish (a) and (b).”
Who is hiring?
In order for alts to continue to go mainstream, we need the best talent to go into the space. Here are some openings at private markets firms. If you’d like to connect with any of these teams, let me know and I’m happy to facilitate an introduction if appropriate. If you’re a company or fund in private markets, feel free to reach out to share a job description you’d like to be listed here to highlight for the Alt Goes Mainstream community.
The latest on Alt Goes Mainstream
Recent episodes and blog posts on Alt Goes Mainstream:
🎙 Hear John Avery, VP Digital Assets, Tokenization, Web3 at fintech giant FIS talk about how evolutionary changes can lead to revolutionary changes in private markets. Listen here.
🎥 Watch Lawrence Calcano, Chairman & CEO at iCapital, and I take the pulse of private markets on the first episode of our monthly show, the Monthly Alts Pulse. Watch here.
🎙 Hear Seyonne Kang, Partner and member of the private equity team at $134B AUM StepStone, discuss how the VC industry is dealing with today’s venture market. Listen here.
🎙 Hear Chris Ailman, the CIO of $307B CalSTRS, discuss how he manages a portfolio with ~40% exposure to private markets. Listen here.
🎙 Hear 44th Vice President of the United States and Chairman of Cerberus Global Investments Dan Quayle share his insights on geopolitics and investing. Listen here.
🎙 Hear Mark Anson, the CIO of $28B Commonfund, discuss why he thinks size discipline and sector focus lead to outperformance in VC. Listen here.
🎙 Hear Filip Dames, Founding Partner at leading European Seed VC Cherry Ventures, share why he’s so excited about the European venture ecosystem right now. Listen here.
🎙 Hear Graham Elton, Partner & Chairman of EMEA Private Equity at Bain & Company discuss how the $3.7 trillion in dry powder in private equity will get put to work. Listen here.
Thank you for reading. If you like the Alts Weekly, please share it with your friends, colleagues, and anyone interested in private markets.
If you have any suggestions, would like me to feature an article, research, or would like to recommend a guest or topic for the Alt Goes Mainstream podcast, reach out! I’d love to include it in my next post or on a future podcast.
Special thanks to Riley Robinette for his contribution to the newsletter.
Join thought leaders from top private markets firms like Blackstone, Goldman Sachs, Apollo, Fidelity, iCapital, Franklin Templeton, and more.