Normal Catalyst, considered one of Silicon Valley’s largest capital companies, is gearing as much as launch what’s referred to as a “continuation fund” value between $800 million and $1 billion, based on an individual accustomed to 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 actual continuation fund portfolio composition continues to be being decided. Nevertheless, it’ll doubtless embody stakes in Stripe, Gusto and Circle, the particular person stated. The agency has lately employed Jefferies as its secondary funding advisor.
As soon as the fund is established and buyers are discovered for it, Normal Catalyst’s unique restricted companions might be supplied a alternative: promote their shares and money out, making means for brand new buyers, or keep invested within the continuation fund, a course of known as ‘rolling.’
Whereas personal fairness companies have used continuation funds for a very long time, the mechanism has solely lately grown in recognition with enterprise capitalists, largely due to the dearth of IPOs and slowdown in M&A exercise. This has compelled some giant enterprise capital companies 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 also be now within the strategy of promoting a gaggle of present corporations value as a lot as $1 billion to secondhand consumers.
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 good thing about 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-about extra founder pleasant than secondary gross sales of shares of particular person startups as a result of they don’t introduce new house owners to a startups’ cap desk. The identical VC stays invested, albeit by a special fund.
VCs have been extra keen to promote within the secondary markets lately as a result of some LPs are telling them that they’ll restrict their investments within the VC’s subsequent fund in the event that they don’t obtain a minimum of 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 could not not solely be taking a haircut on present valuations but in addition strolling away from potential share value progress.
Nonetheless, considered one of 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 quite than roll right into a continuation fund.
As for when this LP might be supplied this alternative, the particular person didn’t say, and it isn’t potential for TC to estimate. Continuation funds are advanced offers that may take six months to a yr to promote. These transactions may fail completely. Final yr, Tiger International tried to promote a kind of a continuation fund known as a strip portfolio, which sells solely a portion of stakes in every firm. But it surely couldn’t discover a purchaser keen to pay a value that the agency thought was honest, PitchBook reported.
When earlier this yr, Shasta Ventures requested its restricted companions to approve a continuation fund that was priced 35% off its carrying worth, the agency’s buyers voted in opposition to the deal, Axios reported.
In April, Monetary Occasions reported that Normal Catalyst is nearing $6 billion in capital commitments for a brand new main fund.The brand new fund nonetheless hasn’t been introduced. When TechCrunch requested for extra info associated to its fundraising actions final week, the agency declined to remark.
