Future Returns: An Alternative Fund for Special Ventures and Growth Capital

Future Returns: An Alternative Fund for Special Ventures and Growth Capital

Conversos, the private wealth arm of New York investment firm Step Stone, recently launched a Venture and Growth Fund as a second offering aimed at making private market investments less complex and more accessible to wealthy individual investors and smaller institutions.

Individuals still need at least $50,000 to invest in Conversus StepStone Private Venture and Growth — better known as CSPRING — and with CPRIM, the company’s diversified private markets fund. But this minimum is well below the usual limit of $250,000 or more that most private equity funds require.

The low entry point is one of the many characteristics of Conversus StepStone funds that make them more suitable for individuals who do not allocate enough capital to alternative assets, according to Tom Setema, CEO of Conversus.

Sophisticated family offices, ultra-high net worth individuals, and endowments may invest 50% or more in private markets—which generally yield higher returns than public markets—but most wealthy individuals own less than 5% in private funds, Stima says.

girl I recently spoke with Sittema about how Conversus StepStone funds, created through the 1940 Investment Company Responsible for Mutual Funds Act, are designed to be more attractive to individuals—a trend throughout the investing world—and about what they offer.

Private market funds with a difference

CPRIM, a $700 million fund launched in October 2020, invests in a diversified portfolio of existing private equity funds (known as secondary funds) while also investing a small portion of assets in private debt markets and approximately 20% of assets in real estate and infrastructure , according to the July fact sheet.

By diversification, Conversus StepStone means investors’ assets are spread across multiple fund managers who invest in different industry sectors and use different strategies. Conversus StepStone funds are not concentrated in one industry, with the CPRIM Fund having invested about 20% each in broad categories such as information technology and healthcare.

According to Conversus StepStone, the fund returned about 7% for the year ended July 31, and has a total return since inception of about 78%, with some variance depending on the stock class.

The new fund, CPSRING, is also diversified, but its focus is on venture capital and growth funds that can deliver higher returns. The fund came after StepStone acquired Maryland-based Greenspring Associates in September 2021. Greenspring, which had $19 billion in assets under management at the time, specialized in venture capital investment.

CPRIM and CSPRING, available through financial advisors and other private wealth platforms, charge a management fee of 1.4% annually on the fund’s equity, although there is no performance fee. Many private equity funds charge a management fee of up to 2% and a performance fee—also known as carry interest—that is about 20% of the fund’s earnings above a predetermined return threshold.

Sittema argues that another advantage for individual investors is the simplest tax reports. For federal taxes, the company issues standard 1099 forms for investor financing in place of what is known as a “Schedule K-1,” a form required of investors in private equity and venture capital funds. K-1s are usually required by partnerships, and can require a great deal of complex tax planning.

Sittema also points out that the fund structure they offer allows investors to put their capital to work right away, rather than waiting to be called by a private equity manager when needed to invest. Investors can wait years for their capital to be called, but since the timing is unknown, these assets should be readily available as cash.

Also, investors can redeem the shares periodically. Each quarter, the company offers to buy back up to 5% of the fund’s total net asset value. With a traditional private market fund, investors’ money can be held for a decade or more.

With most private equity, you invest and then you wait. In this case, if you want partial or total liquidity, we provide it through a bidding process.

Why invest in private markets

One reason to invest in private markets is that many young companies either don’t eventually become public or remain private for much longer, which means that individual investors don’t always have the opportunity to invest in them—particularly at the point when these companies are gaining traction with clients. and rapid growth. At this point, they receive capital payments from venture capital and growth funds.

According to London-based Preqin, a data provider for the alternative and private market industry, AUMs in venture capital have grown to over $2 trillion, growing at a compound annual growth rate of 20.2% from 2012 to September 2021. This means good quality, And fast-growing firms don’t find it difficult to access capital, but for individual investors, “there was no point of entry,” Sittema says.

In a press release marking the launch of CSPRING, Conversos CEO Bob Long said that “the secular trends that drive value creation in venture capital and shareholder equity will continue to grow.”

CSPRING will invest in “tier one” venture capital and growth equity managers along with capital invested by StepStone institutional clients. Sittema says StepStone advises or manages about $600 billion of private equity capital for investors.

He adds that investing “side by side” does not mean individual investors are getting leftovers after large pension funds and endowments are full. Instead, the company has built in safeguards to ensure that doesn’t happen, including oversight by an independent board and an appropriation policy that gives Conversus StepStone funds a chance to invest in any deal.

“We have the ability to say we are interested, and if others are, then the final allocation is prorated based on available shares, size, other risk constraints and so on,” Sittema says. He adds, “Whatever the deal is for institutional investors it’s the same for funds, CSPRING and CPRIM – it’s the same economics.”

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