When you ask buyers to call the largest problem for enterprise capital right this moment, you’ll seemingly get a near-unanimous reply: lack of liquidity.

Regardless of investing in startups or VC funds that elevated in worth, because of the dearth of IPOs, these bets aren’t producing a lot, if any, money for his or her backers. That’s the disadvantage of personal funding versus the general public market. Shares of corporations in non-public corporations like startups can’t be bought at will. The businesses should authorize their current buyers to promote their shares to permitted others, often called secondary gross sales.

Money-hungry enterprise buyers, whether or not VCs themselves or their restricted companions, are more and more seeking to promote their illiquid positions to secondary patrons. 

Now, add in that many early-stage startups had been overvalued throughout the fundraising frenzy that peaked in 2021 and that these shares could now be value much less. That presents a brand new and distinctive alternative to purchase stakes in seed-stage VC funds, in addition to shares in startups, at relative bargains.

At this time, Cendana Capital, a fund of funds that invests in dozens of seed-stage enterprise companies, and companion Kline Hill Partners, a agency centered on shopping for small beforehand owned non-public property, are saying a brand new $105 million Kline Hill Cendana Companions fund, which is effectively above the $75 million goal they initially hoped to boost.

“Over the previous two years, we’ve been listening to from our portfolio funds, ‘Now we have a household workplace that wishes to promote their $2 million dedication. Would you be concerned about shopping for it?’” stated Michael Kim, founder and managing director of Cendana Capital.

Kim felt the chance to extend his agency’s possession in enterprise funds and promising startups at a considerable low cost was too good to go up. However, since investing in secondary property requires experience that none of Cendana’s buyers had, he determined to hitch forces with Kline Hill.

Elevating cash for this fund was simple, Kim stated. Cendana’s restricted companions had been asking Kim to benefit from this purchaser’s market.

“We merely handed the hat round to our current LPs at Kline Hill and Cendana,” stated Kim.

Shopping for stakes in seed funds

Michael Kim, founder and managing director of Cendana Capital. Picture Credit: Michael Kim

What units Kline Hill/Cendana’s investing car aside is that it’s shopping for secondary curiosity in seed-stage companies and particular person corporations from seed funds. Most current secondary gamers are too massive to go after this chance, in response to Kim.

It’s laborious to not see the symbiosis between the 2 companies. Cendana’s relationships with its portfolio funds, together with Lerer Hippeau, Forerunner Ventures and Bowery Capital, are serving to it take the lead on sourcing secondary offers. It then passes these alternatives to Kline Hill, which values, underwrites and negotiates the transaction worth.

Whereas Kline Hill has been investing in secondary VC for the reason that agency’s founding in 2015, Chris Bull, a managing director on the agency, stated that partnering with Cendana brings the kind of info that’s extraordinarily helpful to the funding course of.

“What’s most enjoyable for us is we’re capable of get transactions performed the place I feel both of us individually would have had issue getting throughout the road,” Bull stated.

The present plan is to speculate the entire $105 million fund by way of the tip of 2024. The 2 companies are giving this three way partnership a strive, and if it goes effectively, they’ll increase a successor fund subsequent 12 months.

The 2 companies aren’t alone in noticing a big alternative in scooping up beforehand owned enterprise stakes. Conventional secondary buyers, reminiscent of Lexington Partners and Blackstone, not too long ago raised their largest secondary funds ever. Whereas these autos goal all varieties of non-public property, buyers say a portion of that capital is certain to go to enterprise. As well as, Trade Ventures has picked up a virtually $1.5 billion fund devoted to secondhand VC. 

However billion-dollar funds like these “usually give attention to a lot, a lot bigger, extra multistage companies,” Kim stated. Making use of such large finance ways to the seed stage is much much less prevalent. 

Kline Hill/Cendana is on to one thing. With VC-backed corporations tending to remain non-public longer than their buyers’ 10-year fund cycles, the necessity for liquidity will seemingly solely proceed to develop.