Q&A: Adams Street on investing in PE, VC through market cycles

Adams Street Partners, a private market investor that backs buyouts and venture funds, has seen quite a few economic cycles in its 50-year history.

During those years, the firm has amassed $50 billion in AUM and established a relationship with dozens of buyout and venture capital firms, including TA Associates, Berkshire, Benchmark, Accel and Andreessen Horowitz. Adams Street also runs separate strategies that invest directly into growth-stage venture companies and limited partner secondaries, along with offering private credit for middle-market buyout transactions.
 

Last month, the firm promoted Brijesh Jeevarathnam, who previously oversaw Adams Street’s venture fund investments, to lead investment efforts for VC and buyouts funds.

We recently spoke with Jeevarathnam, who is based in the firm’s Bay Area office, about buyouts and venture performance, future fundraising and areas of the market in which he is seeing the most significant weaknesses.

This interview was condensed and edited for clarity.

PitchBook: Which asset class—buyouts or venture—is more impacted by the current market conditions?

Jeevarathnam: On the margin, the venture is down a little bit more than buyouts. A mitigating factor for venture should be Figma’s acquisition by Adobe, but the deal won’t close this year. Managers in VC need just a couple of those large deals to swing the “return” pendulum back in VC’s favor. We will see what liquidity will be like in 2023. The IPO markets will likely be closed for at least a part of the year, but M&A activity could pick up. We are hearing from our managers that there’s interest from strategics to acquire large private tech companies.

But unlike in the Figma deal, many of those potential M&A exits may end up being done at valuations below their last venture round—so essentially as a down round?

That’s possible. Last year, some venture-backed companies raised at valuations well above their fundamentals. A subset of those will likely be acquired for a multiple that will be a great return for initial investors, but at a valuation below the most recent round.

Harvard University’s endowment recently reported that it’s down 1.8% for the year, but its investments in VC, PE and real estate were its strongest performers. Harvard acknowledged that private managers may not have yet fully marked down their assets to reflect market conditions. When do you think private valuations, specifically in PE, will catch up to the public markets?

Private valuations always lagged behind public markets.

Our buyouts investments are down around 5% for the first half of 2022, but the S&P 500 was down about 24%.

For the first six-plus months of the year, company fundamentals have remained sound, but we are now seeing some softening in growth rates and margins. This is just starting to happen.

We will likely see more markdowns in both the buyouts and venture in the next couple of quarters. But we don’t expect private portfolios marked down as much as the S&P 500.

What sectors or types of companies are seeing this softening in growth rates and margins?

We ask ourselves this question, and it is a company-by-company situation.

The growth rate for certain categories—ecommerce for example—really spiked during the pandemic. Their growth rate is slowing down.

Besides pandemic-driven companies, there is not an area I can point to.

People worry about consumer companies, but based on facts so far, we are not seeing anything that would lead us to say “consumer category X is definitely slowing down.”

The dealmaking environment is slowing down. Do you think any venture firms will cut the size of their existing funds as they did during the dot-com bust?

Based on our conversations with managers, I don’t think anybody plans to give back capital. I don’t expect any fund truncation activity in the next three to six months, but I don’t know what will happen beyond then.

Venture fundraising is on track to see its highest-ever fundraising year. While PE fundraising activity seems to be slightly lagging last year’s records, 2022 is panning out to be a strong year for new fund formation. What do you expect fundraising to be like in 2023?

Fundraising in 2023 is going to be meaningfully lower than in 2022.

While the majority of our investors are on track to keep their allocation to buyouts and venture consistent, a small number of LPs are challenged from a denominator perspective [which is when public assets drop in value vis-a-vis private valuations.] LPs are making room in their budgets for the top-performing managers in venture and buyouts. But it is possible that they will lower their commitment from $100 million last time to $75 million this time.

But it is very hard for the bottom 40% of funds to raise. They have to have a reason to exist. These funds are pushing out when they come back to market.

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