If it’s locked, can you unlock it?

With large amounts of capital locked in traditional investment funds, institutional investors and limited partners (LPs) might start exploring new asset classes and strategies.

🌂 Illiquidity: $1.3 trillion. That’s the amount of unrealized assets residing in venture capital funds raised between 2010 and 2018 (source: Preqin). With so much liquidity tied in existing funds, generating more predictable outcomes from venture portfolios is on every investor’s mind.

🤑 Distributions: over the past 2 years, institutional investors have grappled with the denominator effect due to downturns in public markets, leading to an excessive allocation in private sectors, including VC. Additionally, fewer exits led to a 15-year low in distribution to LPs calculated as a % of net asset value (NAV), limiting their capacity to reinvest cash from VC gains. 2024 could be marginally better though many investors are still facing budget constraints. This might exacerbate competition with more liquid and lower-risk asset classes, such as high-yield Treasuries or other alternative investments.

🌥️ Fundraising: for startups, the liquidity crunch among investors means facing delays in fundraising, distressed sales, or even shutdowns. Less than a third of companies that raised a Series A in 2021 have raised their next round to date. The ongoing adjustment in public markets continues to affect private markets, leading to fewer investment rounds, extended intervals between funding, and an increased likelihood of distressed sales or closures in 2024 and 2025.

In short: the current illiquidity overhang in private markets will persist unless there is an improvement in the IPO landscape and unless venture-backed software startups recalibrate for more realistic growth expectations. A vast number of VC-backed startups are operationally misconfigured for high growth, and are candidates for unlocking value and liquidity in the next 24 months.

New strategies, such as structured growth equity strategy, can alleviate these issues by providing capital, underwriting revenues with the right retention characteristics, diversification profile and unit economics, and working with founders to steer these companies towards financial sustainability. By aiming for exits within a 3-5 year horizon, such strategies can shorten the duration of investments and create a new and uncorrelated source of returns for allocators.