‘Our funds are 20 years old’: limited partners confront VCs’ liquidity crisis

Limited partners (LPs) investing in venture capital firms are currently facing significant challenges as the asset class undergoes a transformation. With funds lasting nearly twice as long as in the past, emerging managers are grappling with fundraising hurdles while billions remain locked in startups that may never reach the inflated valuations of 2021. During a recent StrictlyVC panel in San Francisco, five influential LPs managing a combined total of over $100 billion discussed the current state of venture capital and identified some emerging opportunities amid the turmoil. One striking observation was the extended life of venture funds, leading to unforeseen complications for institutional investors. Adam Grosher, a director at the J. Paul Getty Trust, which oversees $9.5 billion, noted, "Conventional wisdom may have suggested 13-year-old funds. In our own portfolio, we have funds that are 15, 18, even 20 years old that still hold marquee assets." Despite this, Grosher warned that the asset class has become significantly more illiquid than many might expect. This prolonged timeline has forced LPs to rethink and adjust their allocation strategies. Lara Banks from Makena Capital, managing $6 billion in private equity and venture capital, revealed that her firm now anticipates an 18-year fund life, with most capital returning between years 16 and 18. Consequently, the J. Paul Getty Trust is reevaluating its capital deployment, opting for more conservative allocations to avoid overexposure. Active engagement with the secondary market has become crucial. Matt Hodan of Lexington Partners, which manages $80 billion, emphasized that all LPs and general partners (GPs) should be proactive in this area to stay relevant in the evolving liquidity landscape. However, the panel also addressed the stark reality of venture valuations, highlighting a significant disconnect between perceived value and actual market offers. For instance, a portfolio company previously valued at 20 times revenue was recently offered just 2 times revenue in the secondary market, indicating a staggering 90% discount. Michael Kim, founder of Cendana Capital, which focuses on seed and pre-seed funds, elaborated on these valuation discrepancies, indicating that GPs might face markdowns of up to 80% on what they believed to be their top-performing companies. The panel identified the so-called "messy middle" of venture-backed firms—those growing modestly but once valued at over a billion dollars during the boom—as particularly vulnerable. The rise of AI technologies has exacerbated these issues. Companies that opted to conserve capital and weather the downturn saw their growth rates decline, while competition from AI-driven firms surged. Hodan warned that without adaptation, these companies could face severe challenges. The fundraising climate for new fund managers is also increasingly tough. Kelli Fontaine of Cendana Capital pointed out that established firms are currently attracting significantly more capital than emerging managers. Institutional LPs, previously eager to invest in new funds during the pandemic, are now prioritizing quality and concentrating their investments in larger, proven platforms. Despite the challenges, Kim noted a potential silver lining: the market has largely filtered out "tourist fund managers" who entered during the 2021 boom. The panelists agreed with Roelof Botha's assertion that venture capital should not be regarded as a traditional asset class, citing the vast dispersion of returns among managers. To navigate this complex landscape, institutions like the J. Paul Getty Trust are looking for reliable platform funds while also fostering emerging manager programs to drive returns. Banks suggested that venture capital is evolving beyond a mere portfolio enhancement, serving instead as a hedge against disruption in the broader market. As the discussion progressed, panelists noted a trend toward GPs selling into up rounds rather than only at distressed prices, with some distributions coming from secondaries at premiums. The stigma surrounding secondary sales has lessened, transforming them into a vital part of the investment strategy. For new managers seeking capital, the panel offered pragmatic advice, encouraging them to engage with family offices and explore co-investment opportunities. As competition stiffens, they emphasized the importance of networking and maintaining access to top founders. In terms of sector focus, AI remains dominant, alongside traditional strengths in biotech, fintech, and crypto. The panel observed that geographic proximity to innovation hubs like San Francisco continues to be a significant advantage, suggesting that the investment landscape is ripe for further evolution as new trends emerge.