Investment Strategy

  1. “Creative capital structures” allow for downside protection. In this case, creative capital structure being a preferred share with 1.5x liquidation preference.
  2. Insight has developed an expertise in this industry as proven by their track record.
  3. A concentrated portfolio of 8–12 companies- generally seen as riskier from a portfolio standpoint- risk is adjusted by contractual returns.
  1. Target returns for the fund are lower than what the average private equity sponsor targets. Note: StepStone does not seem to have done any situational analysis regarding what conditions the fund can outperform under and what conditions can cause the fund to underperform.
  2. Increased competition (see picture below)
  3. Opportunity Fund will be targeting similar companies to the Flagship funds, but focused on funds that have less than 25% IRR or the seller wants too high of a price. Insight will not be investing into the same company through both the Opportunity Fund and the Flagship Fund
Source: StepStone Group

Management Team

  1. The team is experienced in software and technology investing.
  2. The ability to leverage an in-house consulting team gives Insight an edge in supporting companies post-closing.
  3. A culture that cultivates the ability to source deals and win them lead by Jeff Horing.
Source: StepStone
  1. No dedicated team to oversee the Opportunity Fund. Large portfolio of over 200 companies in the Flagship Fund.
  2. Two MDs, one VP and three principals had left in the last fund cycle.

Track Record

  1. Track record of superior returns both on a relative and absolute basis. Metrics include: net IRR, net TVM and DPI
  2. Loss ratio of 10% vs the standard 12%. Loss ratio has decreased as fund generation has increased.
  1. this is a first time strategy that is StepStone is implementing.
Source: StepStone

Fundraising & Portfolio Fit

ESG

Recommendation

Conclusion

  1. Understand your target returns and be able to clearly articulate how you will reach them. In the case of StepStone it is through preferred stock with a 1.5x liquidation preference.
  2. If possible, try to have an internal consultant as part of your PE/VC team, as they can work with portfolio companies on a range of different problems.
  3. Track record is very important. StepStone referred to Insight’s track record in different sections of the recommendation report.
  4. There are opportunities for arbitrage between CA and StepStone. Now with CA no longer publicly publishing their benchmarks the room for arbitrage is going to grow.
  5. ESG is taken seriously and has a whole section dedicated to it in StepStone’s recommendation report. If you are ESG focused: host an ESG-related event at your LPAC, discuss ESG related metrics in your annual investor update, and (if you want) sign up for UN’s TCFD/PRI.

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Muieen Cader

Muieen Cader

I write about Venture Capital. Previous VC experience with Betatron. Advisor to startups (across the globe) and sailor.