Lake Street Capital (“LSC”) has been a leader in the secondary direct market focused on acquiring venture capital, buyout and other private equity positions from existing investors (“Secondary Directs”). The Firm focuses primarily on the technology and business services industries and has acquired positions from major corporations, financial institutions, founders and other institutional investors.
Historically, Lake Street Capital has targeted investments in late stage companies with growing businesses and strong business models. The firm has led spin-outs of entire portfolios and also provided liquidity on individual positions. Transaction sizes ranged from $1 million to over $50 million.
From 2003 through 2017, LSC managed two funds with over $400 million of invested capital in over 100 companies across diverse industries, locations, and stages of development. Lake Street Capital was funded by institutional investors.
Acquiring Portfolios
Lake Street Capital acquired interests directly in privately held companies from corporations, financial institutions and venture capital firms. LSC acquired portfolios from sellers seeking liquidity, tax efficiency or other financial reasons. Sellers may also be reducing exposure and resources dedicated to the venture business in an effort to concentrate resources on their core operations.
The process LSC undertook in evaluating and bidding for a portfolio includes:
- Company due diligence to evaluate management, financials, technology, customers, competitors, the total addressable market size and follow-on financing requirements.
- Legal due diligence including analysis of the capital structure, investors’ rights, and liquidity preferences.
- Utilization of LSC’s proprietary portfolio valuation methodology.
- Submission of a bid which LSC is likely to adhere to upon final due diligence, closing the transaction in a timely manner, and maintaining discretion throughout the process.
Investment Strategy
Lake Street Capital differentiated itself from typical venture firms with its expertise in transaction structuring in addition to technology industry knowledge and operational experience.
LSC’s role as an investor included:
- Reputation: LSC has a reputation for discretion, honesty, creativity and delivering on commitments. The firm worked expeditiously to meet the needs of sellers as well as portfolio companies.
- Team Experience: The LSC team offered over 30 years of varied experience in technology, finance and private equity.
- Relationships: The LSC team utilized relationships with senior management and investors in the technology sector to understand and enhance value.
- Transaction Experience: LSC has completed transactions from the routine to the unusually complex.
- Responsiveness: The experienced team provided personal attention with a distinct lack of bureaucracy.
Managing Investments
Once LSC acquired a portfolio, the job had just begun. LSC was committed to supporting selected companies with follow-on investments as well as providing strategic and financial advice. LSC worked to enhance returns through a value-added, hands-on approach.
LSC’s role as an investor included:
- Investing follow-on capital in selected portfolio companies and when appropriate, acting as a lead investor in new financing.
- Providing sound and creative ideas as it relates to capital structure, strategy and partnering.
- Facilitating introductions for partnering and financing discussions.
- Exercising investor rights to protect our investment and maximize the return to our limited partners.
Secondary Direct Market
The secondary direct market has grown considerably in the past several years as new investments have outpaced exits for the majority of private equity asset classes. From 1996-2004, over 30,000 new companies were funded while less than 4,000 companies experienced exits through M&A transactions or IPOs according to Venture Economics. This liquidity gap continues to grow as the IPO market has declined dramatically from its peak in 2000 and new companies are being funded at a fairly consistent rate. As a result, investors have turned to the secondary market as a means of actively managing their private equity portfolios and achieving liquidity from their investments.
Lake Street Capital believes this trend will continue as investors understand the benefits of selling their direct equity investments in the secondary market. These benefits vary by investor but may include capital gains loss realization and tax recovery, releasing capital to reinvest into other asset classes, industries or in their core business, and freeing up scarce management resources. Founders may also benefit from the ability to diversify their personal holdings. As liquidity increases in the private equity industry, all investors will benefit from more accurate pricing and the ability to generate more consistent cash returns.