LP Unlocked shorts: What We're Hearing about Venture Liquidity with Meghan Reynolds of Altimeter

This episode focuses on the growing concerns about generational liquidity within venture capital, discussing LP's perspectives and strategies GPs use to address liquidity issues.

1. Venture capital is facing a liquidity challenge, with fewer public exits and higher IPO barriers contributing to prolonged investment timelines.
2. LPs are increasingly concerned about their ability to fund future capital calls due to delayed returns, prompting them to reassess their investment commitments and expectations.
3. GP-led secondary transactions are emerging as a critical strategy for managing liquidity, allowing LPs to realize gains without waiting for traditional exit pathways.
4. There is a shift in mindset among GPs towards proactive liquidity management, reflecting a more strategic approach to meeting LPs' needs and timelines.
5. Transparency and communication between GPs and LPs are vital in aligning strategies and expectations regarding liquidity.

1: Introduction to Liquidity Issues

Samir and Meghan introduce the topic of liquidity concerns in venture capital, outlining the main challenges faced by LPs and GPs. Samir Kaji: "We're diving into what limited partners are thinking today about venture liquidity."

2: Market Dynamics and Impact

Discussion on how recent market dynamics, including decreased public exits, affect liquidity. Meghan Reynolds: "The public markets have repriced, and the number of companies going public has decreased pretty dramatically."

3: Solutions and Strategies

Exploration of solutions like GP-led secondaries and how they are being implemented in the market. Meghan Reynolds: "GP-led secondaries are a way to generate liquidity and allow LPs to exit investments on a shorter timeline."

1. Enhance communication with LPs: Maintain open lines of communication to manage expectations and align on liquidity strategies.
2. Explore secondary markets: Consider GP-led secondary transactions as a viable option for early liquidity.
3. Regularly reassess liquidity timelines: Update and communicate changes in expected timelines due to market conditions.
4. Educate stakeholders about market dynamics: Help LPs understand how market changes affect their investments and the rationale behind liquidity strategies.
5. Implement robust liquidity management protocols: Develop clear guidelines for when and how to pursue liquidity events, tailored to the needs of different LPs.

Joining me again is Meghan Reynolds, who leads capital formation at Altimeter Capital.

This time we discuss the significant liquidity challenges in the venture capital market, focusing on the concerns of LPs about funding future capital calls and the longer wait times for returns. With a decline in public offerings and exits, LPs and GPs are now turning to alternative strategies such as strip sales and GP-led secondaries. We highlight the need for GPs to establish clear liquidity management as the dynamics of the industry continue to change.

If you’re a VC investor, then I’m sure you already know about Sydecar, the go-to platform for emerging VCs to manage their SPVs and funds. Sydecar is on a mission to make private markets more accessible, transparent, and liquid by standardizing how investment vehicles are created and executed. Their powerful software allows VCs to launch SPVs and funds instantaneously, track funding in real time, and offer hassle-free opportunities for early liquidity.

Whether you’re syndicating your first or fiftieth deal, Sydecar acts as your silent operating partner, handling all back-office functions in a single place. Sydecar always has your back, so that you never have to worry about chasing subscription docs, lost wires, or late K-1s.

With all the recent ups and downs in the private markets, the last thing you want to worry about is whether your back office is operating smoothly. Sydecar's responsive and proactive customer support team is there to assist, helping you build trust with your investors and tackle the challenges of building your firm.

Visit sydecar.io/ventureunlocked to learn more.

About Meghan Reynolds:Meghan Reynolds is Partner and Head of VC Capital Formation and Fundraising for Altimeter, a lifecycle technology investment firm. Prior to joining Altimeter, Meghan was Managing Partner and Co-head of Fundraising at TPG. She began her career and spent nearly a decade in the Investment Management Division of Goldman Sachs.

Meghan graduated from the University of Notre Dame.

People

Meghan Reynolds, Samir Kaji

Companies

Altimeter Capital

Guest Name(s):

Meghan Reynolds

Content Warnings:

None

Samir Kaji

Welcome to another episode of Venture Unlocked, the podcast that takes you behind the scenes of the business of venture capital. I'm your host, Samir Kaji, and today we have another version of venture unlocked shorts, this time focused on the world of what limited partners are thinking today. Joining me again is Megan Reynolds, who leads capital formation at Altimeter Capital, and an area that we've both been hearing a lot about recently is the growing concern LP's have about the generational liquidity within venture capital. As a result, we wanted to have a quick catch up on this episode. On what we are both hearing and.

Seeing in terms of what LP's are saying and the different things gps are doing about addressing the growing illiquidity concern. I hope you enjoyed the episode. If you're a venture investor, then I'm sure you already know about Sidecar, the go to platform for emerging VC's to manage their spvs and funds. Sidecar is on a mission to make private markets more accessible, transparent and liquid by standardizing how investment vehicles are created and executed. Their powerful and robust software allows VC's to launch spvs and funds instantaneously, track funding in real time, and offer hassle free opportunities for early liquidity.

Whether you're syndicating your first or 50th deal, Sidecar acts as your silent operating partner, handling all back office functions in a single place. Sidecar always has your back so that you never have to worry about chasing subscription documents, lost wires or late k one S. Sidecar's responsive and proactive customer support team is there to assist you, helping you build trust with your investors and tackling the challenges of building your firm. To learn more, visit Sidecar IO Ventureunlocked. Sameer Kaji is the CEO and co founder of Allocate.

Sameer Kaji

Allocate and venture unlocked are independent of each other. Any statements or references made by Sameer or his guests regarding third parties investments or securities are solely their views and opinions and are not intended as investment advice or an endorsement of such parties or securities by Samir, his guests, or allocate. Allocate or its clients may maintain relationships with or investment positions in guests, third parties or securities mentioned in this podcast. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Megan, happy Friday.

Megan Reynolds

Great to see you again. Great to see you. Samir, happy Friday. I had a dinner yesterday and I was with a number of different fund managers and we were talking about the. Fundraise market, what LP's are thinking, and.

Of course, this show is for you and I to talk about what we're. Hearing from the world of LP's, which. Has been pretty dynamic over the last couple of years, given that the market. Reset and the topic of conversation yesterday was around this notion of liquidity. And of course we saw in 2021, record amount of liquidity coming back to.

Samir Kaji

LP's, whether it was ipos, M and A's spacs. And over the last two years, the public markets have repriced. The number of companies going public has decreased pretty dramatically. I think last year, less than $70 billion worth of exits, about twelve x down from 2021. And it does appear on a go forward basis, the difficulty and the degree of difficulty to go public is increasingly high.

The bar to get to a public. Offering is really high in terms of. Revenues and the other fundamentals. And even m and a might be. A little bit tough given what we've.

Megan Reynolds

Seen with things like figment, Adobe, and. Maybe the legal deterrent, or at least the FTC and regulatory deterrent. The conversation then turned to, well, if. We don't know where the organic ways. To generate liquidity are through traditional exits.

How should we be thinking about generating. Liquidity in an asset class that although. Historically has always been known for long term liquidity? It seems like the period is getting longer and longer. I know you and I have chatted.

Samir Kaji

About this, you've talked to some LP's. But let's maybe just set the foundation. Of generating liquidity and what that actually means. And is this something you're hearing from LP's as well? I am absolutely hearing about liquidity from LP's in nearly every conversation that I'm having, and I think that there are a couple of key questions on LP's minds as it relates to liquidity in their venture portfolios.

Megan Reynolds

One is, am I going to be able to fund my next wave of capital calls, given that activity is definitely heating up in venture? We went through the late 2022 2023 period where activity was relatively slow. The liquidity pressure actually was eased a little bit in the portfolio because there weren't a lot of capital calls coming. And so the pressure for liquidity comes in this when you have a large portfolio of private assets and you've created a model that suggests you can make new commitments based on liquidity coming off of your pre existing commitments. The question that comes out of this will be, can I fund my next wave of capital calls from my existing portfolio?

The next question that I'm hearing is just what is the right timeline for expectations for liquidity in my VC portfolio? Should I think about this as seven to ten years. Should I think about this as five to seven? We went through a period of time where VC funds were raising funds in a very quick pace, every 18 months to two and a half years. And that's faster than liquidity comes out.

And so I think there was, because that happened at a time that liquidity was coming out very quickly. People revised their expectations to say, I can fund new commitments, expecting a shorter duration of my investments, but I think everybody's resetting that model now and thinking through, what are the more reasonable expectations. The third question that I hear a lot is, when I invest in a GP and I have a position that goes public, how should I think about when you exit that position? Because I think we saw a lot of varying behaviors during kind of the peak, the market peak, and even still today. So is that consistent with the questions that you're hearing in your conversations?

It very much is, and for a number of reasons. So you pointed out something I think. A lot of people have discussed. In the LP world, which is 1920. And 21, funds were coming back very.

Samir Kaji

Quickly, and capital was drawn very, very quickly. It wouldn't be surprising for me to. See a fund being 50% called within 18 months of actually starting and activating the fund, which historically, like, if you go back 1020 years, the time period. Between funds is three to four years. Then it contracted to 18 months, 24.

Megan Reynolds

Months, and sometimes even twelve months. Believe it or not, when you had. That, it was working, because in 2021. We had so much liquidity come back. A lot of people made commitments in 21, 22, 23, the liquidity faucet turned off, and now people are looking at and saying, well, I need to think about my new commitments, how do I fund those capital calls?

Samir Kaji

But they also want to stay in the market. And the big question is, well, if. Organic liquidity is not going to happen. At the pace that we would have hoped, is there a way for managers to think carefully about generating liquidity? The generation of liquidity, if you look.

At it historically, a lot of times. It'S been LP led, and LP raises. Their hand to a GP and says, I need to get liquidity. Either that liquidity is because they want. To rebalance their portfolio, or because they.

Megan Reynolds

Just need liquidity to pay new capital. Calls, or if it's a family office, other things that they may need the liquidity for. The efficiency of an LP transfer, it's really, really low. We've seen certain things in gps. Think about different ways to generate liquidity.

Samir Kaji

The most common, of course, is you. Have the ability to sell in a secondary. I saw plenty of those opportunities in. 21, and many people should have done. It and there should have been some.

Kind of methodology of if you're a. GP, when do you sell? How much do you sell in those later stages? And ultimately, do you now view some of the later stage big bulge bracket. Funds as liquidity partners for you?

Megan Reynolds

That was the question that came up yesterday. They said, okay, well, in private equity. This happens all the time. You have lower middle market PE selling their companies to bigger PE firms, and that's a very common thought of, well. There might be a different buying universe.

Samir Kaji

So, curious if you've heard anything from LP's thinking, well, are they asking the questions to the gps of what is your liquidity management structure and protocol when you are offered as secondary sell through a tender? That is a big question, especially when there's a large embedded gain in a position, right. I think there's this question or debate in LP's minds and gps minds of say, if I'm in an investment early, I now have a huge embedded gain, and I may be seven to eight years into this investment, somebody's offering to buy this position at what I think is attractive. But I also think there's Runway from here. In terms of additional return.

Megan Reynolds

As a fiduciary, how should I think about that? What is in the best interest of my LP's? Is it actually to return some liquidity, send some of my basis back, or is it to optimize the return on that investment? And I think it's really challenging, because if you are actually to ask your LP's, you'll get different answers from different stakeholders. Some people that said, yeah, it's reasonable to send your basis back.

Like take at least your basis back and keep some basis in and maximize the upside with the rest. Others that would say just pure, I don't care about liquidity now, I'd rather get maximum return, particularly if this is one of your high performing power law assets. And this is the conundrum that gps face. And I think having a dialogue with LP's, your LP's on this is really helpful and healthy. Having some level of transparency on your thought process and asking for feedback so you actually understand the wishes of your stakeholders and whether or not there is some consistent desire from your LP base is really helpful.

But it is. I think that it's an active consideration that we're particularly facing now, given there is a lack of liquidity in the broader industry. I don't think it's a question when you've got cash coming from other pieces of your private portfolio. But it is the case now. It is a hard thing to balance.

Samir Kaji

And theres not a perfect answer, I dont think in terms of when to decide to sell and I do think some of the things that used to. Persist were a seed. Stage manager would say, well if I sell in the series C or Series. D, is there a signaling effect? I dont think that exists.

I think at that point youre largely. Of lower relevance to the ultimate founder. And even selling a piece of it is not going to create any type of negative signal. It's just a transfer of interest from. You to maybe somebody that's a later.

Stage investor who by the way the. Founder may want to have more ownership. In their company because it's more aligned with where they are as a company. And I've seen people do different things. I think the thing that we hear often is that even though there's not.

Megan Reynolds

A perfect answer, we just want to. Understand what the methodology is that the. GP is going to do. What is that internal calculus of if we sell, this is how much of. Our stake we typically sell along the.

Samir Kaji

Way and what is that meaningful return. That it has to drive for us. To even be interested in doing to sell versus waiting. When you have so many different LP's. That have different priorities and different models.

You'Re not going to create a perfect model for each one of them. But I do think it's really important for gps to have some kind of methodology of when do I sell, what. Does it have to return to the. Fund and in what cases do I want to actually hold the asset longer? Those are really really tough things, but were seeing some big firms do this.

And of course weve seen people like union score ventures and others be very. Active and thoughtful and when to sell in secondaries. The other thing that I think you. And I have seen a little bit. Is not just a normal I will.

Sell during a secondary tender for a traditional round the company is doing, but this concept of strip sales and strip sales historically had been done a lot in private equity and in venture. We've seen a couple of these examples recently. Maybe you can talk through the two examples that you and I talked about. And just maybe first define what is a strip sale. A strip sale is when a GP decides to sell a portion of the, of assets in a portfolio to a secondary buyer.

Megan Reynolds

So there's lots of secondary funds out there, some very large and very well known you could talk about. This is the Goldman Sachs vintage funds or Lexington partners or Stepstone has a big practice harbor. There's a lot of funds that are out there that buy both individual fund positions, but also portfolios of interests from gps. These are called GP led secondaries, and a strip sale is when they'll come and they'll say, the secondary buyer will come and say, I'm going to buy 10% of your entire portfolio, or 20% of your entire portfolio of assets. So literally just returning part of the basis back in your entire fund.

They could also strip out certain assets and say, I'm going to buy six assets as a portfolio from this fund. And LP's are getting back the profits depending on where it's marked in those six assets. So there's a lot of different ways to structure it. We've seen a couple of interesting case studies recently, as you mentioned. One that was very well, you know, written about in the press was a transaction that was done with a group called Primary Ventures.

They had a fund that was a 2015 vintage. So this is eight or nine years into the fund. They were very well into the money on this fund and a secondary buyer bought 30% of the value of the fund and they were able to return that value directly to LP's. And I think in this case, I believe Stepstone was the buyer. It was interesting to me because there was a comment from the GP in this case that said, my job is to deliver liquidity to LP's in ten to twelve years, but it's going to take five years to generate a lot more liquidity, and that will be fine for this new secondary for Stepstone, who's stepping in and buying these assets, but I've got to get the capital back to some capital back to my LP's.

And it's interesting to make that, for the fiduciary, to be making that comment like it is part of my job to get this done in ten to twelve years versus, I think the general mindset historically in VC was it's going to take what it's going to take and we just got to let it ride. And the timeline is the timeline. Yes, these partnerships were structured as ten plus two year timelines, but average funds last way longer than that, and that's just what you get when you invest in the asset class. But in this case, I think it's a changing mindset of gps, of I actually have a timeline that I need to reach and that there are these secondary providers out there that will help me deliver that back. Now, in this case, the fund was very much in the money.

It was a six and a half times multiple TVPI fund, so they were able to get a lot of value back. It wasn't a distress to sale by any means. It was a way to get some real DPI back. It will be very interesting to see if you've got a lot of other, if there's in the money funds that are aged, because we know there's a lot of embedded undistributed value in the industry if we start seeing these large secondary funds really provide solutions there. In additional case studies, I was talking.

Samir Kaji

To an LP, which this LP has. A very long time horizon, meaning that. They dont really need to generate liquidity constantly. They have 10, 20, 30 year horizons. Theyve invested in venture for two decades.

And what she said to me was that were fine with the maximization of the overall return of the fund. But at the same time, from a liquidity standpoint, as that liquidity window continues. To lengthen, because companies are staying private. Longer, probably more so now, because I think in today's world, you have to be more efficient. It's not just growth at all costs.

And to get through those numbers, to get through an IPO or a m and a will take longer and longer and longer, especially with so much late stage capital available, even after the departure. Of some of the, let's call it the tourist capital. But what she said is, from a. DPI standpoint, I look at net IR. And I look at what has actually been returned to me in private equity, I can get x.

Megan Reynolds

And historically venture has been an area. Where Im looking to get, in her. Eyes, 500 to 700 basis points more than what she would get in PE. But if the liquidity window gets longer and longer and longer, well, the realized part of the IR equation just actually. Goes down and down and down because.

Samir Kaji

It takes so long. Her view was, I have to make the case of venture versus private equity. And part of the questions we ask. Managers is what is liquidity management for you? It's not just evaluating the manager in.

Terms of picking, winning and sourcing deals, but it's how are you thinking about. Managing the portfolio as a fiduciary? To make sure you're giving me the. Type of return that makes up for this longer liquidity cycle that we're likely to see. It was a pretty interesting conversation.

So things like primary are a good example of taking money off the table for your LP's in a meaningful way. But yet still retaining some of the upside. There was another one, I think, that. Came up, which is a group eleven, and I believe that was also stepson. And maybe industry was involved in that one, but let's also talk about that example, and maybe this is something that.

Megan Reynolds

We just see more of. And it's not just this outlier or anecdote, but it's part of a longer. Term trend we're going to see. Yeah, in this case, and I don't know the full ins and outs on the transaction, but the GP, which is group eleven again, a 2015 vintage fund, so we're talking about eight or nine years into its life, did a deal with, I think, stepstone and industry ventures that allowed LP's to realize their positions either entirely or partially. So it sounded like there was some sort of opt in or tender process involved that allowed participating investors to get a three x cash on cash return and a 20% IRR in eight years.

I think for a lot of LP's, that's hitting a bullseye. If you're an institutional LP and you're saying, okay, I can get a three x and 20% IRR in eight years, I've hit a threshold and that's kind of. That is success. Check. And whether I see, you know, I have some questions about how long it's going to take from here or how much upside exists, you know, that will be the individual consideration of each LP.

But I think it's another interesting case study of, you know, ways that a secondary funds were able to manufacture a return profile that I think a lot of LP's would desire if they could tie it up in a bow and achieve that outcome. It's definitely something that we are hearing. Much more, for sure. And every single LP conversation I have. Now is how do we think about liquidity?

What is the cap call cadence that's going to happen? How long will they all capital over. Which typically for a venture fund is. Three to five years. But when should I expect my first dollar back?

And if you actually look at the. Benchmarks, you can look at Pitchburg with Cambridge 2015. DPI is not very good. This is despite 2021 being one of. The big watershed years in terms of liquidity.

Samir Kaji

So a lot of people now are. Viewing it under the different lens. And I would just say that for any GP that's listening, whether you have a completely formulaic strategy or not, it's something that you should be thinking about as an avenue to build trust with your LP's. And note that portfolio management, liquidity management, is absolutely part of the business. I think in the next three to five years, we're going to see a.

Lot more of this. We haven't seen continuation funds that much. Within the VC world, certainly private equity, we've seen plenty. NEA did a big one I think. Several years ago where they spun out a firm called Newview which basically took about a billion dollars worth of stakes across.

Megan Reynolds

I dont know if its one firm. Or multiple funds, its all public knowledge. That was a huge thing for a very big firm. Our view is that we will see much more of this venture is going mainstream and some of the influence from. Other asset classes will start to permeate.

Samir Kaji

Within the venture lens. So I want to end with that comment and see if you agree. And I guess just you sit in this really interesting seat because you talk to so many LP's every day, so many gps. Is your assessment that the world of secondaries or the world of liquidity and. Liquidity management is going to now progress to this next level within venture?

Megan Reynolds

I think it will. I think it will continue to evolve, I think in so many ways, and I've written about this and I talked about this, I think venture will ultimately evolve and institutionalize in ways that buyout evolved and institutionalized in 2008 and 2000, like 2008 to 2010. 1112 post GFC when buyout went through a very difficult fundraising period and it forced to be more transparent, more LP friendly, be more creative in how it delivered solutions. And all of that was driven by buyout funds having a hard time raising capital. We're going through a period where a lot of VC funds, most VC funds are having trouble raising the capital that they want to raise on the timeline in which they want to raise it.

And it is that pressure and the pressure to raise that will make you reconsider how you're interacting with your LP's. And I think a lot of gps, VC funds right now are hearing I can't commit to your next fund until I see some results back in my pocket, like until I have some cash on cash returns. Because I've been in this partnership with you now for several funds, I have to see some results. And it is that pressure of I won't be able to raise until I return some BPI that will make gps really get more creative and start to think about ways that they can deliver that cash to LP's outside of the traditional exit path. It's a tricky balance too, because you don't want gps to generate liquidity for the sake of liquidity, just to be.

Samir Kaji

Able to raise additional capital, particularly if it comes at the expense of long term of the past. Because it goes back to that fiduciary responsibility. And youre right. I think the time for fundraising has. Been really stressed over the last two years, and many funds have now doubled the time budgeted for raising a fund.

Megan Reynolds

Even really good firms, really good firms. That have had long track records. The type of questions and the specter of liquidity is a big one. This has been a lot of fun. I always like having the conversations with you because you have your ear to.

Samir Kaji

The ground with what institutional and non institutional LP's? We do the same and it's really just fun talking about what we're hearing in the market. And I think liquidity is a big one. So thanks again, Megan for coming on. So fun to chat.

Megan Reynolds

Sameer happy to do at any time. Thanks so much for listening to another episode of Venture Unlocked. We really hope you enjoyed it. To learn more about Megan and be sure to go to venture unlocked substack at ventureunlocked dot Substack.com, where you'll find detailed notes of the show and a listing of past episodes. You'll also find us on Apple or Spotify, where you can subscribe to get all of the latest shows as soon as they're released.

Samir Kaji

You'll also find us on Apple or Spotify, where you can subscribe to get all of the latest shows as soon as they're released.