General Catalyst is working on a ‘continuation’ fund of up to $1B, sources say

General Catalyst, one of Silicon Valley’s biggest companies, is preparing to launch what is known as a “continuation fund” worth between $800 million and $1 billion, according to a person familiar with the plans.

The continuation fund consists of a portion of the equity that the VC firm has in the portfolio companies. With approximately $25 billion in assets under management as of 2023, the composition of General Catalyst’s ongoing fund portfolio is yet to be determined. However, it will include stakes in Stripe, Gusto and Circle, the person said. The firm recently hired Jefferies as its second investment adviser.

Once the fund has been established and the investors have been found, the first limited partners of General Catalyst will be given the opportunity to choose: sell their shares and cash out, make way for new investors, or remain invested in the fund to continue, a process called ‘wrapping. ‘

Although private equity firms have used continuation funds for a long time, this mechanism has recently grown in popularity among venture capitalists, largely due to a lack of IPOs and a decline in M&A activity. This has forced some large entrepreneurial firms to use the secondary market to refinance their limited partners.

For example, in July, Bloomberg reported that NEA sold stakes in 11 portfolio companies, including Databricks and Plaid, to secondary investors who paid a combined $540 million in assets. Lightspeed is also now in the process of selling a group of existing companies worth up to $1 billion to second-hand buyers.

Like NEA and Lightspeed, General Catalyst’s continuation fund will contain the most significant late-stage startups since the company began investing in assets.

General Catalyst did not respond to a request for comment.

The main advantage of a continuous fund, instead of just selling the shares immediately to another buyer in the secondary market, is that it allows VCs to continue to manage the shares, keeping any future deviations. Continuing funds are also considered more friendly than secondary sales of individual start-up shares because they do not reveal new owners on the start-up fund’s table. The same VC remains invested, albeit in a different fund.

VCs have been more willing to sell in the secondary markets recently because some LPs are telling them that they will limit their investment in the next VC fund if they don’t get at least a return on capital from their old investments.

While revolving funds are often a “win-win” for venture capital, they can be a bit of a conundrum for some limited partners. Since secondaries sell at a steep discount to current valuations—typically a 20% to 30% discount to current prices—when you sell shares, limited partners may not only be taking a haircut from existing valuations but also moving away from increased share price. that may exist.

However, one of General Catalyst’s limited partners told TechCrunch that, given the lack of capital from corporate investments, his pension fund will always choose to invest instead of going into a continuation fund.

As for when this LP will be given this option, no one said, and it is impossible for TC to estimate. Revolving funds are complex deals that can take six months to a year to sell. These operations may fail completely. Last year, Tiger Global tried to sell a type of equity portfolio called a strip portfolio, which sells only a portion of the shares in each company. But it couldn’t find a buyer willing to pay the price the company thought was fair, PitchBook reported.

When earlier this year, Shasta Ventures asked its limited partners to approve a continuation fund worth 35% of its management fee, the company’s investors voted against the deal, reports Axios.
In April, the Financial Times reported that General Catalyst is approaching $6 billion in capital commitments for a new flagship fund. The new fund has yet to be announced. When TechCrunch asked for more details related to its fundraising activities last week, the company declined to comment.