Bloomberg Línea — New York-based, Latin American-focused venture firm Valor Capital Group has sold part of its Fund II to US private equity company StepStone. In the transaction, called a general partner-led strip sale, Valor transferred 25% of its shares and securities to StepStone and returned nearly $80 million to its investors, with around $15 million of new capital being invested in its new fund.
StepStone had already acquired part of other funds, such as Israeli GP Qumra Capital in 2020. A GP-led secondary transaction is where a fund sponsor sells one or more assets from a fund it manages to a new fund.
This year’s transaction comes amid a tough scenario for risky assets as interest rates go up worldwide to bear a rising inflation. Late-stage financing plummeted 92% in the third quarter compared to the same quarter in the outlier year of 2021, according to the Association for Private Capital Investment in Latin America (LAVCA).
In an interview with Bloomberg Línea, managing partner and co-founder of Valor Capital Scott Sobel said that StepStone is not a distressed buyer, and it only bought a part of Valor’s portfolio that the companies are doing well.
“It allows us to de-risk the fund by only selling 25% and transferring 25% to this new partnership with them. From a portfolio management standpoint and a de-risk standpoint it is good to do that,” he said.
“As an investor, it is good to do that. Many of our investors want us to swing for the fences, a baseball analogy, when you are swinging for the fences you hit when you hit a home run. You wanna stay with your company as long as you can and outsize returns. That portfolio will have those outcomes with companies like Cloudwalk, Olist, and Gupy. We are going to have this huge tenfold return. But it’s smart to de-risk a little bit to your investors as well. That is our fiduciary. We are not forced to do anything. But we did a good thing from a portfolio management standpoint.”
Liquidity amid an uncertain scenario
According to Pitchbook analysts, series C and D rounds for American startups will see the most down rounds in 2023 for US Venture Capital, as these companies are currently the most starved for capital. They also see seed-stage startup valuations and deal sizes continuing their ascent, reaching new annual highs despite a slowdown in total deal value and count.
SPAC IPOs and mergers will continue to decline while liquidations will continue to increase in 2023, according to Pitchbook. Venture growth deal value will fall below $50 billion in the US and 2023 US VC mega-round activity will fall below 400 deals, hitting a three-year low. Fundraising for venture capital in the United States will fall between $120 billion and $130 billion in 2023, Pitchbook analysts’ forecast.
As for private equity, Pitchbook analysts report that US PE funds’ returns will likely underperform public markets. “Take-private deals should continue, but firms will probably shift gears to much smaller targets. Exits could hit a 15-year low, relative to new investments. And buyers in need of leverage are likely to tap nonbank lenders almost exclusively in the coming months,” says the report.
Sobel says the transaction is good for StepStone, Valor, and its investors, “and it is a good transaction for our portfolio companies having StepStone as an investor in them as well because they are full lifecycle investing. It’s a win-win-win”.
In private equity, if a company doesn’t carry out an IPO or an M&A exit transaction, investment firms look for other ways to stay with the companies in the so-called continuation funds, according to Sobel. While for venture capital, the asset class has become more liquid over time.
“It started with secondaries where founders’ management teams were able to sell parts of their positions that helped them with their own lives and other reasons to bring on strategic partners. Secondaries happened with founders for a long time it also has in the US and other areas these GP-led strip sales had been happening and I think it’s a very smart way to de-risk portfolios from a portfolio management standpoint while leaving a lot of upsides there,” Sobel said.
“I don’t see there being any issues with it, actually, it is a positive reflection because the folks that are doing this type of transaction are Goldman Sachs, StepStone, and many other fund of funds are doing that. They are buying good assets. It’s a positive reflection on your assets.”
In Brazil, Valor Capital backs companies such as Cloudwalk, Olist, Gupy, and Buser, and says that with the secondary sale nothing changes on the board. The firm has also been bullish on crypto and blockchain tech and invested in companies like Hashdex and Bitso.
One of Valor’s largest positions is in the e-commerce provider Olist, where it sits on the board. “We just took a small slice of our position, which is a very large position, and we transferred into a fund, we took the securities, put into a separate vehicle and we co-manage that small piece with StepStone.” Valor has been investing in Curitiba-based unicorn Olist with its second fund and two of its opportunities fund.
“Olist has been a big outcome already, it’s a billion-dollar company, in which we invested from an early stage. And there are many of these in the portfolio: Stone, Gympass, and Cloudwalk. There is no pressure from our investors to do this, it was us thinking about our fiduciary with our investors and returning the capital.”
Increasing the pace of investment
The firm recently gained a B Corp registration. Sobel says Valor is the first cross-border venture firm and fund to return the capital over fund to sequential funds to sequential vintages without any crossover investments.
“It’s good news to attract more foreign direct investment in the form of venture capital in Brazil. I think institutions, large endowments, pensioners, want to see managers like us returning the fund capital through liquidity events to our investors over multiple vintages and cycles.”
Valor says its portfolio companies Buser, Loft, Kovi, and Frete.com has been doing “tremendously well”.
“Everyone of our venture funds in Brazil and Latin America has been top performing on a global benchmark.”
Sobel says Valor has increased the pace of investment by 40% comparing the fourth quarter of 2021 to the third quarter of 2022. Yet, due to the market volatility, it has “calibrated” moving investments to early stages.
“We always have been a Seed investor, we just did more on the Seed stage side, and we knew we were going to see downward pressure from the public markets to the late-stage private markets to growth equity and we were going to see those multiples compressed, so we just moved early.:
Valor has over $2 billion in assets under management across six funds and over 100 portfolio companies. The manager is also closing two new funds: Valor Venture Fund 4 and Valor Opportunity Fund II.