VC trends tend to make their way from the US across the Atlantic eventually: secondaries, continuation funds — and, now, strip sales. Insiders say this type of secondary transaction, which involves a VC fund manager selling stakes in a bundle of portfolio companies instead of just one asset, is an area of increasing interest for European VCs as they remain desperate for liquidity.
“I didn’t think that would come for some years, but it’s here,” says Joe Schorge, founder and managing partner of UK-based fund of funds Isomer Capital, adding that he knows of some European investors looking into the strategy right now.
Simon Schachinger, a VC-focused lawyer at law firm Orbit in Berlin, says he’s observed several such strip sales being discussed in Germany in recent months. “We see an increasing number of managers being interested in them and actively starting to…go into the market and approach placement agents to test if that’s a potential exit solution,” he tells Sifted, though he hasn’t seen these deals go through yet.
Strip sales aren’t an entirely new trend — Jonathan Graham, then managing director of secondaries at PE firm Asante Capital, told Sifted last year that lots of European VCs were looking into them — but it’s been picking up recently.
In the last six months, one placement agent who works with GPs to market their deals to other investors says they’ve pitched strip sales for about eight European VCs.
“It’s becoming more prevalent, for sure,” they tell Sifted.
It feels like VC interest in secondaries has passed an inflection point.
The trend comes as the appetite for secondaries generally is on the rise. “Over the last six months, it feels like VC interest in secondaries” has “passed an inflection point,” Ravi Viswanathan, founder and managing partner of secondaries-focused, US-based NewView Capital, tells Sifted.
He says the firm hosted two secondaries events in London last month which are normally put on in the US “because of the level of European interest in the topic. Several European VCs are already leaders in terms of proactive fund management, and I think you’re going to see more VCs adopt a hands-on approach to liquidity.”
Behind the rise of strip sales
Unlike a direct secondary, where an investor might buy a VC’s stake in one company, strip sales bundle numerous assets — say, nine or 10 — into one deal, shaving off a sliver of the VC’s total stake in each company and selling it off to another investor. In some cases it might be representative of the whole portfolio.
The driver behind the recent rise in interest of strip sales boils down to one term: DPI, or distributed to paid-in capital, a measure of money paid back to LPs. VC fund managers are under pressure to improve their DPI before heading out to fundraise again — and with exits few and far between, and geopolitical uncertainty mounting, strip sales offer one way to return capital to LPs.
“The trend that you’re seeing — why more and more European venture managers are using this product — is there’s nowhere else to go,” says the placement agent.
They say that the recent tariff noise also may impact the valuations GPs can get for selling strips, which is currently around a 20-30% discount.
There’s nowhere else to go.
Another motivator: VCs may want to crystallise some of their carry, or the investor’s share of profits, notes Schachinger.
From a buyer’s perspective, strip sales can be a way to generate some returns while limiting risk.
Schachinger points out that there are fund strategies that exclusively buy into “proven” portfolios where there’s a decreased risk but where they can still get some value. “You can still double, triple your portfolio, and there’s not so much deal sourcing [or] monitoring board involvement required as an early stage VC,” he says. “If an early stage VC builds their portfolio for five, six or seven years, it becomes interesting for more mature investors to enter the market.”
The types of investors that are looking into these deals are typically involved in LP secondaries, or buying LP stakes in VC funds. “It’s the HarbourVest’s, the Hamilton Lane’s, the Goldman Sachs’, the BlackRock’s, the Blackstone’s,” the placement agent says.
‘It’s a catch-22’
But it’s not as simple as just taking a slice off of your portfolio and shopping it around.
Operational risks and legal snags might jeopardise selling the package to another investor, says Schachinger.
As a VC, “you are usually locked up with your shares in the startups that you have invested in — you have tag along, drag along clauses in the shareholders agreements, and you need to be aware if and under which circumstances or conditions you can actually sell a strip of your portfolio,” Schachinger says, referring to clauses that give other investors rights to sell or buy shares if one shareholder is doing so. “If, for instance, you hold a minority position and you want to just sell it to a third party, it’s usually locked up. Maybe there’s [right of first refusal] rights in the shareholders agreement, so you can’t sell to that third party that you picked, but instead you need to offer to sell to all other existing shareholders in the shareholders agreement first at the same price. That can jeopardise the entire process.
“There’s a legal due diligence involved that you need to do early in the process to see if and under which conditions that can be exercised,” he says.
It’s also not always a popular route for LPs themselves. “It’s a catch-22,” the placement agent says. “It’s tough for them to swallow a discount, but at the same time, these same LPs are asking for distributions.”
Despite the difficulties, the strategy is likely to become more popular as the US tariff wildcard has likely pushed the IPO window out even further.
“There’ll be more deals this year compared to last year,” the placement agent says.
Read the orginal article: https://sifted.eu/articles/rise-strip-sales-secondaries-europe/
