“This is going to be exciting year for IPOs.”
I’ve heard this statement more than a few times since the beginning of this year and even late last year from GPs. I’m no public market or IPO expert so I’ll refrain from commenting on it as if I am. But as a layman, speaking to other LPs who are less lay in this regard, we have about $3 trillion of pre-IPO tech companies that will really make a splash. Plus or minus half a trillion. Figma’s IPO was held in bated breath. 6 months out, post-lock-up, they were down from their IPO price of $33. A great outcome for early stage investors. TBD for people who came in right before the IPO. Whether that’s going to move and open markets or not, that’ll be for people smarter than me to opine on. But the truth is we’re going to see some realization this year.
And the conclusion drawn from public markets creating liquidity is that there will be more capital moving to emerging managers, which naturally, emerging managers are excited about. Yes and no.
Yes, in the sense that early employees will have more liquidity to invest in friends. High net worth individuals who come in at a Fund I, maybe Fund II. So yes, if you’re an emerging manager with friends at these soon-to-be public companies, great. If not, you’ll have to hustle just like everyone else.
Yes, also in the sense that any institutions that are holding equity directly or indirectly in these companies will have a payday. But when they reallocate that capital, it’ll go back into their existing portfolio construction. Most of which isn’t for venture. Many more institutions are not at the growth phases of their portfolio construction, so allocating to high growth, high risk assets are not at the forefront of their mind. Last year, I heard more conversations on who to re-up on in their existing portfolio, as well as chatter on LBOs/PE funds and credit funds than I have on venture. So maybe, in the optimistic case, they do 1-3 more net new checks to managers this year, maybe next. But the uncertainty with the “AI bubble” has many allocators hedging their AI bets in large AI companies with other asset classes.
And so, in that sense, no.
Assuming we have a number of large companies go public this year, we still won’t have the exuberance of 2020 and 2021 in emerging managers. The dollars that are made liquid will just go into the funds that had those outliers in their portfolio, not new managers. And even if they do find the budget to allocate to net new, I don’t think it means they hire a new team member specifically to focus on emerging managers where they write smaller but more checks. The diligence process is still largely the same regardless of check size. And unfortunately, that also means more taxes, K1s and reporting to do if they have more in the portfolio. Speaking anecdotally from institutional allocators I’ve been lucky enough to pick their brain on in the last few years, emerging manager complexity is just not worth it for many allocators. Even through a fund-of-funds vehicle. If you’re reading this blog post, you’re probably well aware of the fundraising environment for fund-of-funds, both standalone ones as well as those part of larger venture or secondary organizations.
That said, I’m personally still bullish on emerging managers, which is where I choose to spend my time and energy. This blogpost is in parts a sanity check, but also a reminder to myself to not believe the bubble in which I live in is what the world thinks.
As the great Richard Feynman once said, “The first principle is that you must not fool yourself and you are the easiest person to fool.”
Photo by Austin Neill on Unsplash
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.
This is one of the only newsletters I actually look forward to. Good job.
You’re too kind! And it means the world to me to hear you say that. Thank you!