News & Analysis

driven by the PitchBook Platform

Q&A: Hamilton Lane managing director on VC secondaries boom

Hamilton Lane is raising $5 billion for its sixth secondary fund to buy all types of PE and VC secondary assets.

Matt Pellini Hamilton Lane

Matt Pellini, managing director at Hamilton Lane

Courtesy of Hamilton Lane

It seems that everyone in the private markets is focused on getting their hands on one simple asset: cash.

This search for distributions is driving many investors to sell their fund interests, portfolios or individual assets. The challenge is there aren’t many buyers.

One such prominent secondaries buyer is Hamilton Lane. The private markets heavyweight has been buying secondary assets for more than 23 years and is currently targeting $5 billion for its sixth secondary fund, which would be 28% larger target than its $3.9 billion predecessor vehicle that closed in 2021.

The firm plans to use its new capital to invest in all flavors of private equity and venture capital secondaries, which could range from purchasing LP interest in a fund to a GP-led transaction or buying a direct stake in a company.

PitchBook spoke with Matt Pellini, Hamilton Lane’s managing director focused on venture secondaries, about his predictions for the market and the types of structures the firm finds most interesting now.

This interview has been edited for length and clarity.

PitchBook: Are you finding that LPs are increasing their interest in secondaries?

Pellini: Yes. There’s a large appetite from LPs for secondaries now. When I joined the firm 14 years ago, a lot of the conversations we had with LPs were explaining secondaries and their benefits. We don’t have too many of those conversations today, because most LPs today are familiar with the secondary strategy.

What structures within VC secondaries do you find the most attractive now? There are obviously different flavors: LP-led, GP-led continuation funds, strip sales and other varieties.

Today, we’re seeing pretty interesting opportunities in terms of pricing and overall portfolio diversification within the LP interest market.

What kind of LPs are trying to sell secondary interest? Is it primarily family offices or do you also see interest from large institutions as well?

All types of limited partners are looking for liquidity now. The lack of exits and therefore distributions has driven many LPs to consider selling secondaries.

However, different LPs are open to different levels of discounts. A big endowment or pension fund may be less willing to take a large discount. But a family office might be more open to it because they have different decision-making process and objectives.

What about GP-led transactions—are you seeing more of them? We’ve heard that several prominent venture players are now in the market with large offerings.

GP-led transactions tend to be bigger [than LP-led ones]. Initiation of those processes are more dependent on buyer appetite and market dynamics versus just the GPs’ desire for liquidity. GPs don’t want to spend time and resources to bring a deal to the market only to find out that there isn’t any appetite.

In Q1 2023, secondary markets for venture assets were nearly frozen. Discounts were the widest they’ve ever been, and there wasn’t really any appetite from buyers for GP-led transactions within VC. As a result, GPs were reticent to bring deals to market. But in the latter half of last year, macro conditions and pricing stabilized, and GPs came back into the market.

There are a lot of GPs contemplating continuation vehicles now. There’s a handful that are in the market, and those range from smaller VCs to large, brand-name VCs.

Do certain types of transactions receive bigger discounts now?

When you talk about discounts, it’s important to think about the reference valuation or the basis to which that discount is applied. In a direct transaction, a lot of times the discount is relative to the prior round valuation. In an LP interest deal, the discount is relative to the latest quarter net asset value as reported by the GP.

The discounts tend to be larger in terms of just the optical appearance on secondary directs. That’s because the last time many companies raised a financing round was at peak market conditions in 2021. While some of the companies have grown into those valuations, there’s a good chance that a 50% discount is still needed on many other companies.

As for LP interests, a lot of GPs do some level of quarterly “mark-to-market.” Many venture funds were marked down 20% to 30% over the course of 2022 and 2023.

If you think about a 20% discount on the LP interest and if you apply that discount to a portfolio of assets that have been written down by 30%, then your discount relative to the last round valuation for those underlying companies is much closer to secondary direct discounts.

I would also argue that the asset quality is higher for LP interest than secondary direct. That’s because a lot of times when investors are selling secondary directs, they may not be selling their best assets.

What are your predictions for secondary activity this year?

Liquidity needs are high from GPs and LPs alike. We’ve already seen an uptick this year, and barring some large exogenous shock or a huge market swing, I expect a meaningful uptick in deal activity this year.

Do you think secondary buyers can absorb all the deals that are being put up for sale?

No, there aren’t enough buyers. But it also depends on size. For venture, if you come to market with a $200 million continuation vehicle, that’s much different than coming to market with a billion-dollar continuation vehicle. You may be able to sign up one or two investment leads at $100 million or $200 million. But that still leaves you with a large hole to fill.

Matt Pellini, managing director at Hamilton Lane

Courtesy of Hamilton Lane

Join the more than 1.5 million industry professionals who get our daily newsletter!