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Secondaries

Growth investors’ liquidity crunch drives new secondaries vehicles

Launchbay Capital is raising a $100 million fund specifically designed to buy secondary stakes from growth-stage investors starved for cash returns.

Secondaries deals are tempting VCs in a down market, and investors are increasingly launching new vehicles to bag hoped-for startup discounts.

UK-based Digital Horizon, an early-stage VC, has rebranded as Launchbay Capital and debuted a fund dedicated to creating liquidity for GPs by buying discounted shares in growth-stage companies. The firm previously invested in household names in B2B software including Klarna, Carta and Monday.com.

Launchbay held a first close of the $100 million secondaries fund Tuesday, with over 25% of targeted capital raised. The firm will target growth-stage private companies with revenue over $50 million and buy stakes in the $2 million to $10 million range.

“When the ’21 venture bubble burst … clearly a lot of the growth stage collapsed,” said Alan Vaksman, founding partner of Launchbay. And especially after growth-stage tech companies took a battering in the public markets in 2022, investors could no longer operate under the assumption that valuations would continue to balloon.

Most of the supply of growth-stage secondary share sales is coming from early-stage investors looking to return cash to their LPs or from family offices, according to Vaksman. A diverse cross section of GPs, from crossover investors to hedge fund managers to seed-stage investors, have turned to the secondary market over the last 18 months in order to free up liquidity for LPs, who are less likely to allocate new capital to a firm that hasn’t yet generated returns from a prior fund.

The IPO backlog of VC-backed companies has continued to grow over the last 18 months, according to PitchBook data. Instacart and Klaviyo‘s September IPOs provided some relief to investors but did not lead to a wholesale reopening of the window, which remains largely shut.

LPs have also engaged with the secondary market, selling off stakes in whole VC funds in order to moderate an overallocation to venture.

Launchbay’s fund has an investment period of four years to return capital to LPs, which will likely be an attractive alternative to long lock-up periods which leave LPs high and dry when exits are slow.

The firm has also created an internal platform that benchmarks pre-IPO companies by collecting data on prices from brokers as well as financial information like revenue growth and profitability.

The aim of such a platform is to address a crucial downside to the secondary market: Prices are neither uniform nor transparent, and secondary investors tend to have limited, if any, visibility into the closely guarded financial information of privately held companies.

“The pressure for family offices comes out of the desire from the principles to know what their portfolio is actually worth,” Vaksman said.

Featured image by Richard Newstead/Getty Images

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