Future Returns: A Fund Alternative to Private Venture and Growth Equity

The lower entry point is one of several characteristics of the Conversus StepStone funds that make them more friendly to individuals who don’t allocate enough capital to alternative assets, according to Tom Sittema, executive chairman of Conversus. 

Sophisticated family offices, ultra-ultra high-net-worth individuals, and endowments may have 50% or more invested in private markets—which generally deliver higher returns than the public markets—but most wealthy individuals have less than 5% in private funds, Sittema says. 

Penta recently spoke with Sittema about how the Conversus StepStone funds, which were created through the 1940 Investment Company Act that’s responsible for mutual funds, were designed to be more appealing to individuals—a trend that is taking hold throughout the investment world—and about what they offer. 

Private-Market Funds With a Difference

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

By diversified, Conversus StepStone means investor assets are spread across several fund managers that are investing in different industry sectors and employing different strategies. The Conversus StepStone funds aren’t concentrated in a single industry, with the CPRIM fund 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 through July 31, and has a total return since inception of about 78%, with some variability depending on the share class. 

The new fund, CPSRING, is also diversified, but its focus is on venture and growth-equity funds that could realize higher returns. The fund came about after StepStone acquired Maryland-based Greenspring Associates in September 2021. Greenspring, with US$19 billion in assets under management at the time, specialized in venture-capital investing.

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

Another advantage for individual investors, argues Sittema, is simpler tax reporting. For federal taxes, the firm issues standard 1099 forms to fund investors instead of what’s known as a “schedule K-1,” a form required of investors in private equity and venture capital funds. K-1s are typically required by partnerships, and can require a hefty amount of complex tax planning. 

Sittema also points out that the fund structure they offer allows investors to put their capital to work immediately, rather than waiting for it to be called up by a private equity manager when it’s needed for an investment. Investors can wait for years for their capital to be called, but because the timing is unknown, those assets need to be readily available as cash. 

Also, investors can redeem shares periodically. Each quarter, the firm offers to repurchase up to 5% of the fund’s aggregate net asset value. With a traditional private-markets fund, investor funds can be locked in for a decade or more. 

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

Why Invest in Private Markets

A reason for investing in private markets is that many young companies either don’t go public eventually or stay private longer, meaning individual investors don’t always have the opportunity to invest in them—particularly at the stage when these companies are gaining traction with customers and growing fast. At that point, they are getting capital infusions from venture and growth-equity funds. 

According to London-based Preqin, a data provider to the alternative and private market industry, assets under management in venture capital have risen to more than US$2 trillion, rising at a compound annual growth rate of 20.2% from 2012 to September 2021. That means good quality, fast-growing companies don’t have difficulty getting access to capital, but for individual investors, “there hasn’t been an entry point,” Sittema says.

In a news release on CSPRING’s launch, Bob Long, CEO of Conversus, said the “secular trends driving value creation in venture capital and growth equity will continue.” 

CSPRING will invest in “top-tier” venture capital and growth equity managers alongside capital invested by StepStone’s institutional clients. StepStone advises or manages about US$600 billion in investor capital in the private markets, Sittema says. 

Investing “alongside” doesn’t mean individual investors get the leftovers after big pension funds and endowments have had their fill, he adds. Instead, the firm built in protections to ensure that can’t happen, including oversight by an independent board and an allocation policy that gives the Conversus StepStone funds an opportunity to invest on any deal. 

“We have the ability to say we’re interested, and if others are too then the ultimate allocation is prorated based on available equity, size, other risk limitations and so forth,” Sittema says. And, he adds, “whatever the deal is to the institutional investors is the same for the funds, CSPRING and CPRIM—it’s the same economics.”