The pertinence of VC secondaries

By Alexandre Covello

The Realistic Optimist is a newsletter covering the globalized startup scene.

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Author biography

Alexandre Covello is the managing partner at 109 Capital, which advises LPs & GPs with venture capital exposure on how to unlock value from their portfolio. 

Alexandre previously co-founded AngelsCube, a London-based investment platform helping private capital investors (family offices, UHNWI, etc.) access UK and European early-stage technology startups.

Alexandre is also the chair of early stage tech investments for the Harvard Business School alumni angels of France.

Learn from the…worst

Before understanding venture capital (VC) secondaries, one has to grasp the private equity (PE) type. What PE secondaries put in place more than a decade ago shape how VC is going about it today. 

Following the 2008 financial crisis, underperforming PE general partners (GP) found themselves in a pickle. Their portfolio was underperforming and their limited partners (LP) were nervous about their return on investment. This made it difficult for GPs to raise money. 

Some came up with an idea: carve out their portfolio’s best performers into a new fund, a “continuation” fund, while selling the rest of the portfolio. Those sales returned some money to LPs. They could then either buy into the new continuation fund or call it a day. The GP, armed with a sexier fund and a sexier pitch, could also hunt for new LPs. 

Soon enough, less subpar GPs figured this was a good idea and started doing it as well. This particular type of PE secondaries is known as “GP-led”. 

Other flavors exist. One of them is referred to as “LP stakes”. In this scenario, one LP approaches another LP to buy out their stake in a particular fund. The GP doesn’t necessarily need to be involved.