With the IPO market still stalled many corporate investment arms are turning to the secondary market to generate liquidity that can be recycled into backing new AI startups.
The drive for corporates to generate extra cash so that they have money to invest in artificial intelligence technologies is leading investment units to sell off older startup assets in the secondary market.
Olav Ostin, managing partner of venture capital fund TempoCap, says corporates seeking to reduce or exit portfolio investments is keeping his team busy. TempoCap runs a €250m fund that buys startup portfolio investments or stakes in startups in the secondary market.
“We are seeing a lot of activity from CVCs in AI, pushed by the corporates at the top level, saying we need to transform ourselves to AI,” says Ostin. “There is a need to generate some liquidity from older assets so they can recycle this money and invest in AI.”
Corporations have been the biggest investors in AI over the past two years, having backed $101bn in AI fundraising rounds since 2023, according to the Global Corporate Venturing data.
The investment push in AI coincides with a dearth of exits from IPOs, which has led to a liquidity crunch at VC funds. The secondary market, where funds can buy and sell VC investments, provides a way for investors to generate cash.
Cleaning out the portfolio
“I am not surprised to see these big corporates moving their large ship towards AI. And this is creating huge opportunities for startups. But it is a creating a need for rebalancing their portfolios,” says Ostin.
Like financial VCs, CVCs invested large amounts in venture capital in the bubble years between 2019 and 2021. Many corporate venture capital units are now seeing a change in c-suite managers, who are looking to generate liquidity by shedding some older startup investments.
“You see new CFOs questioning the raison d’etre of CVC, and sometimes they don’t go that far but they are saying: we’ve invested $300m, before we give you the next $100m, you return us some money,” says Ostin.
CVCs are selling a portion of their portfolio or entering so-called strip sales, where the corporate splits their shareholding in a startup but keeps a certain percentage of the equity so that they remain an investor.
The size of transactions in the secondary market is also growing. Previously most deals averaged between $20m and $50m. Some deals are now as large as $200m, says Ostin.
“At the moment, everybody needs some cash. Someone was asking me, who’s selling, and I said, this is the wrong question. The question is who is not selling,” he says.
Ostin’s firm has seen portfolios of climate tech and ESG (environmental, social and governance) investments shopped around in the secondary market in Europe. In some examples, startups have been offered for sale that directly compete with the corporate parent or compete with a company that the corporate has bought.
“Someone was asking me, who’s selling, and I said, this is the wrong question. The question is who is not selling.”
Olav Ostin, managing partner of TempoCap
A European corporate that has looked to the secondary market to sell VC investments is French energy company Engie. Its corporate venture arm is looking to the secondary market as the IPO and M&A markets slow.
“We are discussing and collaborating quite a lot with growth and private equity funds, because we invested at seed and series A,” says Johann Boukhors, managing director of Engie New Ventures.
“They can look in our late-stage portfolio and see a curated deal flow with some market traction, because Engie is a customer or partner for the technology of the startup, and secondly some financial attractiveness,” says Boukhors.
TempoCap seeks to hold on to and grow an investment it has bought in the secondary for between three and four years before selling it. It typically sits on the boards of portfolio companies and will invest capital in the investments to help them grow.
With so many corporate investors tapping the secondary market, Ostin sees it becoming a more common part of portfolio management.
“In five years, it will become standard that between 20% and 50% of your portfolio would have been sold to secondaries.”
Olav Ostin, managing partner of TempoCap
“We’ve been operating in this market for a long time, but it was a niche market. Now it is becoming a mainstream market,” says Ostin.
“In five years, it will become standard that between 20% and 50% of your portfolio would have been sold to secondaries,” he says.
