Several trends across private market asset classes have intensified the need for LPs to understand exposures at the company level. In venture, a significant rise in late-stage capital investment over the past decade has allowed many private companies, particularly in the technology sector, to fund their growth without entering public markets. As a result, allocators increasingly face overlapping exposures to the same investments across different fund positions.
Additionally, robust co-investment strategies, GP’s increased use of continuation funds, and the resurgence of club deals compound LPs’ data management challenges, as they also heighten the likelihood of multiple capitalization table exposures to one business across different vehicles and strategies.
As LPs continue to increase their private market allocations, these risks accumulate, and identifying investment exposures becomes paramount for understanding drivers in their portfolios, managing risk, and assessing allocations.
Over the past two decades, various factors have fueled private companies to prolong their public market debuts. Regulatory and management hurdles driven by Sarbanes-Oxley and public stock sensitivity to earnings setbacks or perceived lapses in strategy execution play a significant role. Weighing regulatory burdens and the challenges of managing quarterly expectations, many companies have chosen to sidestep the public markets, placing a greater focus on long-term growth strategies. In 1980, companies went public at a median age of 6 years, this increased to 11 years by 2021.
However, the predominant influence in private companies and their investors pursuing extended hold periods lies in the burgeoning accessibility to private capital. Attractive returns, growing verticals, and low interest rates tripled the capital inflow into VC funds between 2013 and 2021. This uptick — largely stemming from nontraditional investors seeking venture-like returns — infused VC portfolio companies with record amounts of capital for growth, evidenced by the minting of 532 US unicorns since 2013.
Uber and Airbnb exemplify prime examples of this trend, waiting 10 and 12 years before orchestrating two of the largest tech IPOs in history. By the time they saw their tickers grace the Nasdaq, they had largely displaced the taxi and vacation industries, illustrating the massive growth that occurred off the “street” in the ZIRP era.
Further, a sluggish IPO and M&A environment has amplified this trend, leading many investors to circumvent lackluster exits by transitioning their highest-quality assets into continuation funds.
As venture-backed firms extend their growth cycles in private markets, the opportunity for LPs to gain overlapping exposures to similar investments increases. With numerous venture-backed companies progressing to Series E, F, and beyond, LPs can easily accumulate multiple cap table exposures to a single business through various investment vehicles.
As a result, aggregating company-specific exposures has become vital for LPs to identify their top holdings and leverage scenario modeling and risk analyses to assess the impact of various exit outcomes and vulnerabilities to market conditions.
For example, if the IPO market gains momentum this year, LPs will likely want to understand potential exit scenarios for their top companies. Consider the below example of an LP with commitments to nine funds, all invested in Stripe, excluding other co-investment exposures. As Stripe considers its timing for an IPO, the LP may want to evaluate overlapping exposures to anticipate how different distribution and return profiles could play out.
Understanding company exposures can also aid LPs in gauging vulnerability to valuation shifts. For example, if an LP discovers substantial unrealized exposure to a VC-backed company that raised during the market peak in 2021, delving into its fundamentals — such as its burn rate, revenue, etc. — allows them to assess the probability of top assets encountering a down round or valuation haircut.
LP’s demand for greater exposure to attractive investment opportunities has spurred the growing popularity of co-investments. Fundraising for co-investment-focused funds quadrupled over the last decade, climbing from $4 billion in 2010 to over $15 billion in 2021. Among many perks, co-investments can help LP control deployment pace, increase exposure to certain GPs and sectors, lower investment fees, and enhance returns.
LPs with specific geographical or sector insight can leverage their knowledge by pursuing deals aligned with their expertise. Since leading managers frequently cap allocations to their primary funds due to high demand, co-investing provides investors with a route to boost their exposure to top-tier managers.
Most notably, co-investments offer more favorable economics than traditional fund structures, as they often have zero or reduced fee and carry structures. Individual co-investment deals typically lack management fees or carried interest charges, while investments through co-investment funds generally involve a one percent fee and 10 percent carried interest — a notable discount from the traditional 2 and 20 fee structure. As a result, co-investments can deliver rosier return profiles.
While co-investments present a heightened potential for enhanced return profiles, they also create operational and portfolio risks, as they wield considerable influence over an LPs’ exposures. Further, when investors acquire significant stakes in a single company, they are directly exposed to company-specific fluctuations — if the company underperforms, it can directly affect the LPs’ returns.
Efficiently managing co-investments across a portfolio often involves complex data management. Calculating the unrealized value of a company in a co-investment alongside the original fund position quickly becomes a resource-intensive exercise at scale. As a result, ongoing monitoring of co-investment portfolios presents a significant barrier for LPs eyeing these opportunities.
Directly investing in companies via co-investments also requires distinct expertise from traditional private equity fund investing, as teams must assess the merits and risks of individual assets. Often, LPs need to make swift decisions on co-investment opportunities, and efficient evaluation and diligence become crucial for understanding potential within existing portfolio companies. This, in turn, necessitates streamlined, centralized access to portfolio company data.
Private equity club deals made a resurgence during the pandemic and remained a key feature of deal activity in 2023. Sponsors collaborated in several noteworthy transactions, with the $13 billion bid for eBay-backed Adevinta headed by Permira and Blackstone, marking one of the most prominent deals.
In an expensive investment landscape, club deals offer several benefits to sponsors. Collaborating to navigate high multiples can help GPs pursue larger targets and tap carveouts from publicly traded companies. Club deals also offer diversification, and leveraging a consortium’s collective strength can enhance access to optimal debt financing and favorable lending terms.
However, while club deals can prove advantageous for sponsors, these benefits don’t always extend to Limited Partners. For example, when multiple GPs collaborate on a deal, strategy alignment is essential. However, with many investors at varying points in their fund lives, different end goals can quickly complicate exit strategies.
Additionally, club deals tend to concentrate risks in private equity portfolios, turning a significant stake in one company into a major holding in multiple funds. This complexity heightens when LPs are invested with multiple GPs collaborating on a deal. And when investors with distinct strategies — say buyout and infrastructure — collaborate on an opportunity, it disrupts LPs’ expectations for uncorrelated returns across various funds. As a result, club deals introduce unanticipated intricacies to LPs’ portfolios and demand more robust portfolio monitoring resources.
Historically, LPs have aggregated company unrealized exposures in Excel; analysts and associates pull down quarterly reports from their data rooms and scrub the investment schedules for the unrealized value for each investment. This data is then manually entered into a master Excel spreadsheet to try and identify the largest exposures in their portfolio for that quarter.
Often, this approach struggles to accommodate variations in company naming conventions caused by rebrandings and mergers. Accurately extracting investment schedule data for funds where an LP is committed to a sub-vehicle for either tax, legal, or social purposes also surfaces challenges.
Further, LPs with quarterly reporting duties, such as pension funds and funds of funds, deal with friction in report production due to the time-consuming nature of aggregating these exposures. When carried out in Excel, this process often takes weeks.
Beyond reporting, this approach lacks the agility for LPs to assess their risks during market or company disruptions. Consider a special situation like the FTX bankruptcy. When the company collapsed, LPs needed to promptly identify their exposure across often several venture allocations. Spending weeks to obtain an unrealized exposure calculation is far from ideal when evaluating the impact of an evolving crisis.
Chronograph’s flexible portfolio monitoring technology streamlines the data management challenges associated with traditional methods for compiling unrealized value calculations. Our advanced technology allows LPs to efficiently aggregate unrealized company exposures with full auditability to the underlying assumptions and source documentation. As a result, LPs can easily identify their top positions, manage exposures amid shifting market conditions and disruptions, and inform their future allocation decisions.
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