public information on the market value of their portfolios as implied by a transaction. While it is not news that the value of venture portfolios has been damaged in the tech bust, the VC funds see no need to provide specific data on the subject that might confirm investors' worst fears. And buyers see no need to cross up the other parties in the transaction, and may not want to tip their hands on pricing or strategy.
The VC bubble of 1999 and 2000 brought with it a wave of nouveaux zillionaires eager to stash some of their fortune in venture funds. Now, with many stock portfolios in enfeebled condition, some of those people are seeking a way out, facing debts run up in the good old days. "You have high-net-worth individuals once worth $100 million, now worth less than their debt is worth," says Merrill Lynch investment banker Jack Weingart. But it's no easier to identify them. "It tends to be a very private market, and not a lot gets disclosed," Weingart says.
Even so, most of the dollar volume in the VC secondary market comes from institutional sales. Weingart says that in some cases, institutions that expanded aggressively into venture capital now want to sell some of their positions. Francisco Borges, CEO of Landmark Partners, says some institutions want to redeploy capital from mature or troubled funds to invest in newer funds – sometimes run by the same general partners of the funds they want to sell.
Many large institutional portfolios suffered from an unexpected spike in a portfolio’s commitment to one asset class when the value of their tech holdings collapsed. Suppose a pension fund decided to invest 10 percent of its $100 million in assets in venture funds, with the rest in growth stocks. As a result of the recent stock slide, the other 90 percent of the portfolio could be down dramatically – say, 40 percent or more. Suddenly, the $90 million stock portion of the portfolio is worth $54 million – and the $10 million venture investment has grown to be more than 15 percent of the portfolio. Solving that problem requires unwinding some venture investments.
Depsite the hush-hush nature of most of these transactions, details on a few large transactions have leaked out. In the largest-ever liquidation of private partnership interests, J. P. Morgan Chase (CCF) raised a reported $1 billion in the secondary market, with Lexington acquiring about 51 percent of the total and a variety of investors taking the rest. Chase, which sees its venture investing at least partly as a way to find new banking customers, said they wanted to free capital to invest in new deals, and eliminate duplication, where they had investments in multiple funds from the same venture capital firms. Lucent is reportedly now in the market to sell positions in about 50 venture and private-equity funds. Other big sellers in recent years have included Raytheon (RTN), St. Paul Cos., NatWest and Bank of America (BAC).
The J.P. Morgan Chase deal highlights some of the complexities of this odd market. Consider the issue of how to price the transactions. Dale Meyer, head of private equity fund raising and secondary sales for the bank, says Chase sold interests in 123 funds, with "gross commitments" of $1.5 billion, about 70 percent of which had already been invested. If you assume that each fund had at least 10 investments – a highly conservative estimate – then figuring out what the whole was worth required estimating the value and exit strategies of well over 1,000 companies, most of them still private. As part of the due diligence process for the sale, Morgan provided potential investors with more than 300,000 pages of material on the funds and their constituent parts. The process of selling the investments, which started last summer, took almost a year to complete.
In the secondary market, due diligence is crucial
