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The venture capital group G Squared has raised $1.1bn for its latest fund to capitalise on growing investor demand for its strategy of buying pre-existing stakes in start-ups.
Founded in 2011 and based in Chicago, G Squared has backed technology groups such as artificial intelligence company Anthropic and cyber security specialist Wiz.
While typical venture capitalists focus on buying new shares in start-ups, G Squared invests most of its funds in existing shares, bought directly from start-up employees and investors who want to sell some of their holdings.
The secondary market has been growing because of a slowdown in the public listings and takeovers that would otherwise allow shareholders to sell their stakes.
The new fund is the company’s sixth and of a similar size to its previous one. According to founder and managing partner Larry Aschebrook, it will now have about $4bn of assets under management.
Aschebrook said many fund managers faced pressure from their institutional investors to return cash, but were finding it hard to do so because of the slow market for initial public offerings.
“For years companies and traditional growth mangers viewed secondaries as something that was bad,” he told the Financial Times. “Thankfully, finally it’s our time to shine.”
Other groups are also seeking to capitalise on the challenging market, such as Pinegrove Capital Partners, a new group backed by Brookfield Asset Management and Sequoia Heritage that was founded last year to target buying shares in cut-price start-ups.
Aschebrook said investors can buy shares in the secondary market at about a 30 per cent discount to company’s value, and at a 70 per cent to 80 per cent discount to the prices investors paid during the low interest rate-fuelled boom times of the coronavirus pandemic.
G Squared has also backed businesses including sports merchandiser Fanatics and European ride-hailing group Bolt.
It bought about $135mn of shares in Amazon-backed Anthropic from FTX, as part of the crypto exchange’s bankruptcy proceedings.
G Squared says it has a “concentrated” portfolio and has generated about double the cash that investors pay in — a metric known as “distributed to paid in capital” or DPI — over its five-to-seven-year investment timelines.
Only 9 per cent of venture funds raised in 2021 have returned any capital to their ultimate investors, according to Carta, a software company used by start-ups to track their investors. By comparison, a quarter of 2017 funds had returned capital over the same time horizon.
There are some signs of increased activity in venture markets such as the recent investment in UK financial technology group Revolut — in which G Squared is also an investor — and Aschebrook said he saw an improvement.
“You’re seeing the market pick up in bidding on secondaries,” Aschebrook said, with a focus on “really big, mature businesses”.