Venture capital firms are slowly discovering continuation funds as a way to return cash to investors in a market where exits have been largely frozen for the past two years. But it’s not just big established VC firms in the U.S., which are holding deeply discounted assets, that are interested in launching continuation funds.
London-based Nodem Capital, founded by former Cambridge Associates and Sturgeon Capital alumnus Alex Branton, is taking the continuation fund model to what he calls “next wave” markets. Nodem, which quietly launched this summer, will offer secondary liquidity to the holders of VC-backed assets in markets that include Emerging Europe, Turkey, Latin America, Southeast Asia, and India.
The next wave market’s growth peaked in 2021, when those VC funds raised about $57 billion, according to PitchBook data. Nodem’s Branton explained that the capital raising boom was fueled by Chinese and mobile internet successes by next wave VCs in 2011 and 2012 vintages. Now “more and more of these VC funds with meaningful residual value are hitting their 10-year mark yearly,” Branton said.
The 10-year mark is when private equity firms often seek to create continuation funds to extend the holding period for their top assets that still can’t be sold. The current overhang of these assets is significant, with 20 times more companies being financed by VCs compared with those that have managed to find an exit, according to Nodem.
“Many investors are now seeking and struggling to find liquidity solutions for their next wave holdings, resulting in LPs being reluctant to commit to new funds until value is released from earlier vintages,” Branton said. The firm is launching ahead of what it expects will be an explosive increase in the investable universe — defined as the value of assets held in VC funds older than 10 years old — to around $130 billion from $15 billion today.
He pointed out that these markets have provided profitable exits in the past. FinTech — an area Nodem plans to focus on — has been a particularly strong niche, providing $133 billion in next wave markets since 2018, according to PitchBook data and Nodem calculations.
“The scale of the opportunity we are tapping into is vast,” said Branton, who added that these VC funds have “nowhere to turn.”
“Nodem is a solution the market badly needs,” he said. “I’m offering liquidity for people that really like their tech assets and don’t want to fire sale on the secondary market.” The firm will specialize in offering partial liquidity (through preferred equity investments) to “non-sellers” who want liquidity for distributions but still maintain exposure and control.
Subject to regulatory approvals, Nodem will start investing in the first quarter of 2025. “To begin, our investors are primarily individuals from leading investment firms that believe in the project — with some large U.S. endowments signed up to our co-investment program,” he said. The fund will have a 2 and 20 fee structure, and a five-year life with the option to extend for two years.
Continuation funds have exploded in popularity in the broader private equity world over the past few years, although investor interest has lagged recently, due largely to concerns about conflicts of interest and hefty fees.
Venture capital firms — facing an even worse environment than their private equity peers — have been slow to embrace the trend, in part because there was no need until valuations plummeted after 2022.
Recently, however, a few notable VCs have decided to go the continuation route. For example, Lightspeed Venture Partners is raising a $1 billion fund, as first reported in the Financial Times. Other big VCs said to be forming continuation funds include General Catalyst, New Enterprise Associates, RockPort Capital, Insight Partners, and Trinity Ventures.
Not all efforts have gone well. An attempt by Shasta Ventures to move nearly all of its holdings into a continuation fund was rejected by limited partners, according to Axios. The fund was priced at 65 percent of its value in the third quarter of 2023, plus 1 percent in fees and carry based on performance, Axios wrote.
None of these VC firms returned a request for comment.
