Cendana, Kline Hill have a fresh $105M to buy stakes in seed VC funds from LPs looking to sell

If you ask investors to name the biggest challenge facing venture capital today, you’ll likely get a near-unanimous answer: lack of liquidity.

Despite investments in startups or venture capital funds that have increased in value, due to the lack of IPOs, these bets don’t generate much, if any, cash for their backers. This is the disadvantage of private investment compared to the public market. Shares of private companies such as startups cannot be sold at will. Companies must allow their existing investors to sell their shares to approved third parties, known as secondary sales.

Cash-hungry venture capitalists, whether the venture capital firms themselves or their limited partners, are increasingly looking to sell their illiquid positions to secondary buyers.

Add to that that many early-stage startups were overvalued during the fundraising frenzy that peaked in 2021 and these stocks could now be worth less. This presents a new and unique opportunity to purchase stakes in seed-stage venture capital funds, as well as shares in startups, at relatively favorable prices.

Today, Cendana Capital, a fund of funds that invests in dozens of early-stage venture capital firms and partner Kline Hill Associates, a company focused on buying small, second-hand private assets, announces a new $105 million Kline Hill Cendana Partners fund, well above the $75 million target they had initially hoped to raise.

“Over the last two years, our portfolio funds have said to us, ‘We have a family office that wants to sell its $2 million commitment. Would you be interested in buying it?’ said Michael Kim, Founder and Managing Director of Cendana Capital.

Kim felt that the opportunity to increase his company’s stake in venture capital funds and promising startups at a substantial discount was too good to pass up. But because investing in secondary assets requires expertise that none of Cendana’s investors possessed, he decided to partner with Kline Hill.

Raising money for the fund was easy, Kim said. Cendana’s backers were asking Kim to take advantage of this buyer’s market.

“We just passed the hat to our existing LPS in Kline Hill and Cendana,” Kim said.

Participation in seed funds

What sets Kine Hill’s Cendana investment vehicle apart is that it buys secondary stakes in early-stage companies and individual companies from seed funds. Most existing secondary players are too big to seize this opportunity, according to Kim.

It’s hard not to see the symbiosis between the two firms. Cendana’s relationships with its portfolio funds, including Lerer Hippeau, Forerunner Ventures and Bowery Capital Kline, help it take the lead in sourcing secondary deals. It then forwards these opportunities to Kline Hill, which values, underwrites and negotiates the transaction price.

While Kline Hill has been investing in secondary venture capital since the firm’s inception in 2015, Chris Bull, the firm’s managing director, said the partnership with Cendana brings the type of insights that are extremely valuable to the investment process. .

“What’s most exciting for us is that we’re able to make deals where I think any of us would have struggled to get over the line,” Bull said.

The current plan is to invest the entire $105 million fund through the end of 2024. The two companies are currently trying out this joint venture and, if all goes well, they will raise a new fund next year.

The two companies aren’t the only ones noticing a big opportunity in reclaiming previously held stakes. Traditional secondary investors, such as Lexington Partners And black stone, recently raised their largest secondary funds ever. Although these vehicles target all types of private assets, investors say some of that capital will go toward venture capital. Furthermore, Industrial companies has raised a nearly $1.5 billion fund dedicated to second-hand venture capital.

But billion-dollar funds like these “typically focus on much larger, multi-story companies,” Kim said. The application of such financial tactics at the seed stage is much less common.

Kine Hill Cendana is right. As venture-backed companies tend to stay private longer than their investors’ 10-year funding cycles, the need for liquidity will likely only grow.