Venture gets creative to find exits

Happy Monday. Here’s what we’ve got today…

• A look at Lightspeed’s new continuation fund (and why that might be different for venture than private equity)

• The deal sheet, plus a look at how MIT’s endowment and pension fund put capital to work

Venture investors are dealing with the same fund lifecycle challenges as private equity, so it’s not a surprise that they’re beginning to embrace similar strategies for dealing with assets that have gotten long in the tooth.

First reported last week by the FT, Lightspeed Venture Partners is now reaching out to investors to secure commitments for a new continuation fund, meant to buy out stakes held by existing Lightspeed funds in 10 of the firm’s portfolio companies.

The new fund, whose combined positions Lightspeed is valuing at around $1 billion, will allow limited partners the opportunity to cash out their current investment or roll their pro rata share into the new vehicle.

Much Needed Distributions

As funds age, venture investors are under pressure to provide cash distributions to their limited partners—particularly if they’re trying to raise capital for a new fund.

A slower market for M&A-led exits isn’t helping, but early-stage investors have been more impacted (relative to private equity) by last year’s closure of the IPO window. With just $87 billion of first-time issuer offerings coming to market, 2023 was the slowest year of IPO activity since the dot-com bubble burst in 2001. Public markets activity is now ramping back up, though new offerings remain well below prior levels.

That shouldn’t matter, says Lightspeed chief business officer Michael Romano. “We think VCs can’t just use the excuse that the IPO window is closed, they need to take a page out of the private equity playbook and build more consistent liquidity that LPs can count on.”

Same Thing, Different Considerations

The jump in popularity for continuation funds within private equity is well documented—the strategy accounted for around 80 percent of total sponsor-led secondary market transactions through the first half of 2023—up from just 41 percent in 2019.

They’re far less common, however, for venture investors.

Private equity sponsors generally point to their use of continuation funds as a strategy that’s as much about holding onto top-performing assets as it is providing LPs an opportunity for liquidity. If the gem of the portfolio has another five years of value creation ahead of it, why not keep it around? Less common is the retention of sub-par portfolio companies in the hope of future improvement in either performance or exit prospects.

Recent examples provide some support: Last year, TPG posted a 2.0x MOIC and more than 30 percent IRR on its single-asset continuation fund for Creative Artists Agency, and ArchiMED’s Polyplus continuation fund was said to have returned between 4.5 – 5.0x.

The strategy has also provided solid exits for current funds that are relinquishing their stakes: In December, AnaCap disclosed that its continuation fund-led exit provided a 3.5x MOIC and 52 percent IRR across two assets for its 2016 vintage AnaCap Financial Partners III.

A similar positive portrayal of continuation funds may be more challenging for venture. With its larger number of high-upside, relatively low-probability bets, the asset class may be structurally less likely to accommodate a successful continuation fund.

At the point in a fund’s lifecycle in which a continuation fund becomes a viable option, many portfolios may already have a clear separation between winners and losers. Some investments have wound down operations, while others are (hopefully) home runs. Less common is the more measured “middle of the road” trajectory.

Which selection of those various assets do you then decide to place into a continuation vehicle? This also presents a problem for LPs deciding whether to take the liquidity or roll their stake into the continuation fund. At that point, remaining invested in the new vehicle is a very different proposition than the original fund you signed up for.

Such a dynamic is not necessarily bad, though the decision to participate can be challenging in other ways. LPs must consider whether they’d prefer to lock up capital for another indeterminate amount of time or cash out in a deal that they might feel is being done at a valuation discount to a typically more competitive sale process or public offering.

For both venture and private equity investors, it’s a trend worth monitoring. The latest guidance from the Institutional Limited Partners Association warns members to incorporate questions related to continuation funds into their fund/manager diligence processes, and to scrutinize related language when negotiating LPAs and fund documents (particularly any terms that pre-clear potential GP conflicts of interest).

• Bain Capital is in talks with SK Hynix to restart merger discussions with Western Digital and Kioxia Holdings.

• Dyne Therapeutics, a $1.7 billion market cap biotech targeting muscular dystrophy, is evaluating options following takeover interest in the wake of positive clinical trial data, per Bloomberg.

• JetBlue (Nasdaq: JBLU) said it's considering termination of its $3.6 billion deal for Spirit Airlines (NYSE: SAVE), rather than appeal a federal judge's decision to block the transaction on antitrust grounds.

• Johnson Controls (NYSE: JCI) is considering a sale of its HVAC business, which could be valued at around $5 billion.

• WillScot (Nasdaq: WCS) agreed to acquire McGrath RentCorp (Nasdaq: MGRC), a provider of B2B modular building, storage container, and electronic test equipment rental services, for around $3.8 billion.

• Carlyle is considering a sale of HSO, a provider of technology and engineering services, that could fetch around $1 billion, per Bloomberg.

• Amazon (Nasdaq: AMZN) has terminated its $1.4 billion agreement to acquire iRobot (Nasdaq: IRBT) following European antitrust opposition.

• GFT Technologies has agreed to acquire Sophos Solutions, an IT security and data protection company, from Advent International.

• Continental Auto Parts, owned by Kinderhook Industries, acquired Pro Parts Center.

• Clearview Capital acquired AdCellerant, a digital marketing and sales enablement firm.

• Container Services, a Shore Capital Partners portfolio company, has acquired Apex Plastics, a blow-molded plastic packaging solutions manufacturer.

• Rocscience, a portfolio company of TA Associates, has acquired Diana, a provider of data management and analytics solutions.

• ieDigital, backed by Parabellum Investments, acquired Abaka, a developer of AI-powered digital saving and retirement solutions, which had raised funding from Downing Ventures, Anthemis, Plug and Play Tech Ventures, Ace & Co., QVentures, and Majlis Investment Management.

• Kraken, the technology arm of Octopus Energy, has acquired Kwest, a provider of energy management solutions for solar.

• Brynwood Partners is preparing to sell Hometown Food Co., a producer of ready-to-eat meal products, with Houlihan Lokey advising on the process.

• Bloomreach acquired Radiance Commerce, an AI-driven personalization and merchandising solutions provider that had raised from Foundation Capital, Flight Ventures, and NEA.

• Gamida Cell (Nasdaq: GMDA), a biotech focused on cell and immune therapy, is exploring strategic alternatives, including a potential sale.

• Trilantic Europe acquired a 60 percent stake in Aerocompact Group, an Austrian solar mounting system manufacturer.

• Holcim, a Swiss building materials manufacturer, announced plans to spin off its North American unit via an IPO that could value the business at more than $30 billion.

Tech, Vertical SaaS, & Misc. Enterprise

• Thentia, a developer of regulatory and licensing technology, raised $38 million in Series B extension funding led by First Ascent Ventures, with participation from Spring Mountain Capital, BDC Capital, and Espresso Capital.

• Proof Technology, a developer of document filing and legaltech solutions, raised $30.4 million of Series B funding led by Long Ridge Equity Partners, with participation from Blue Heron Capital and The LegalTech Fund.

• Doppel, an AI-native digital risk protection company, raised a $14 million in Series A funding led by Andreessen Horowitz, with participation from Strategic Cyber Ventures, South Park Commons, and SVAngel.

• ProcurePro, a construction procurement technology provider, raised A$6.15 million in seed capital from Airtree and Saniel.

• Akirolabs, a provider of AI-powered strategic procurement software, raised $5 million in seed funding. HTGF, OTB Ventures, and D11Z co-led, with participation from Serpentine Ventures and several individual angels.

• Cargado, a developer of U.S.-Mexico freight logistics software, raised $3 million in pre-seed funding led by Ironspring Ventures, with participation from Zenda Capital, Wischoff Ventures, Proeza Ventures, and FreightWaves’ Craig Fuller.

• Wondercraft, a developer of AI audio creation tools, raised $3 million in seed funding led by Will Ventures.

Fintech

• Sygnum, a provider of digital assets banking services, raised $40 million in new growth funding at a $900 million post-money valuation led by Azimut Holding.

• CarbonPool, an insurance provider focused on climate risk, raised $12 million in new funding. Heartcore Capital and Vorwerk Ventures co-led, with participation from HCS Capital, Revent Ventures, and former Allianz board members Axel Theis and Christof Mascher.

Consumer & Media

• Carry1st, a South African developer of regional-focused mobile games, received an undisclosed investment from the Sony Innovation Fund.

Healthcare & Life Sciences

• Swift Medical, a digital health technology company serving wound care providers, raised $8 million in new funding led by BDC Capital’s Women in Technology Venture Fund and Virgo Investment Group.

Industrials, Greentech, & Other

• Transmutex, a nuclear engineering firm, raised CHF 20 million in Series A extension funding. Union Square Ventures and Steel Atlas co-led, with participation from At One Ventures, HCVC, and AlleyCorp, among others.

• Chef Robotics, a startup providing robotic solutions for commercial kitchens, raised $14.75 million in new funding. MaC Venture Capital and MFV Partners co-led, with participation from Interwoven Ventures, Alumni Ventures, and existing backers Construct Capital, Red and Blue Ventures, Kleiner Perkins, and Promus Ventures.

• Ceezer, a Berlin-based carbon offset startup, raised €10.3 million ($11.2 million) in Series A funding led by HV Capital with participation from Norrsken VC, Picus Capital, and Carbon Removal Partners.

• GreenSpark, a provider of software for the metal recycling industry, raised $9.4 million in new funding. Zero Infinity Partners and Third Prime co-led, with participation from Bienville Capital.

• Oak Hill Advisors is raising $3 billion for its latest private credit fund.

• After selling prior firm CQS to Manulife, Michael Hintze has raised $2 billion for a relaunch of his hedge fund under Deltroit Asset Management.

• Chamath Palihapitiya has canceled previously announced plans to raise $1 billion for a new early-stage fund.

• Blue Sage Capital is raising its fourth middle market buyout fund.

1. An inside look at MIT Investment Management Company.

• 20VC sits down with MITIMCo’s Ryan Akkina for a conversation on manager selection, portfolio construction, direct investments, and today’s LP environment. — Ryan Akkina of MITIMCO’s Global Investment Team, 20VC

2. Thematic update on B2C marketplaces.

• Battery Ventures releases its latest perspectives and research report on consumer marketplaces. — The State of Marketplaces, Battery Ventures

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