E52: StepStone's Hunter Somerville on How to Scale LP Capital

Episode Summary

Executive Summary: Hunter from StepStone explains how the firm’s venture-growth platform combines fund, direct, and secondary investing to improve diligence and access. He argues that active board observation, flexible structuring, and deep LP/GP networks help identify quality managers and companies in a tougher market marked by lower growth, more illiquidity, and heightened fundraising pressure.

Main Topics: StepStone’s multi-strategy venture platform (Priority: 5/5): Hunter describes the Venture Growth Group as a unified team that does fund investing, direct investing, and secondaries, rather than a traditional fund-of-funds model. He argues the combination improves diligence and decision-making across all three activities. Using direct investing to inform fund diligence (Priority: 5/5): By taking board observer roles and seeing GPs work with founders firsthand, StepStone gains tangible evidence of a manager’s value-add beyond reference calls. This insight feeds back into fund selection and relationship management. Direct-investing strategy and collaboration with GPs (Priority: 4/5): StepStone seeks to lead or co-lead rounds where existing GPs want a non-arbitrary third-party lead. The approach is collaborative, aiming to work with rather than compete against multi-stage firms and existing investors. Secondary investing and strip sales (Priority: 5/5): Hunter explains how StepStone uses secondary tools like strip sales, continuation vehicles, and founder/employee liquidity purchases to access attractive assets and help GPs convert TVPI into DPI in an illiquid market. What StepStone values in emerging managers (Priority: 5/5): The firm looks for founder love, grit, strong ownership, strong references, and evidence that a manager can build an LP base and eventually graduate from fund one to fund two or three. Market conditions for VC, LPs, and private equity (Priority: 4/5): The conversation highlights a difficult fundraising environment, LP over-allocation, muted follow-ons, and venture companies being pushed toward profitability and unit economics. Private equity is increasingly interested in buying mature startups with proven economics. StepStone’s differentiated operating model and resources (Priority: 3/5): Hunter says StepStone provides global coverage, data infrastructure, investor-relations support, and access to PE/network connections that enhance the venture team’s ability to source, diligence, and support companies and funds.

Key Arguments: Doing fund, direct, and secondary investing with the same team creates better judgment because insights from one strategy improve the others. Board observation on direct deals provides real proof of founder support and GP behavior, which is more reliable than reference calls alone. StepStone does not see top-tier firms like Sequoia or Andreessen as direct competitors; instead, it aims to be the lead or liquidity provider when existing investors want partnership. The firm moved from passive co-investing to leading rounds in 2011 to earn a broader role and avoid being limited to small, syndicated allocations. Flexibility in structure matters more than a rigid ownership target at later stages or in secondaries, where access to the right asset at the right price is the priority. Strip sales are useful when GPs need liquidity but want to preserve upside in a portfolio and improve DPI in a market with limited IPO/M&A exits. Emerging managers are best evaluated on whether they create real founder trust, secure meaningful ownership, and show signs of institutionalizable LP support. Fund two is especially difficult in the current market because there are fewer performance signals, making fund one backing and LP base construction more important. LPs are over-allocated and sitting on too much unrealized NAV, so many are more likely to favor secondaries than new commitments. Private equity is likely to target profitable or near-profitable venture-backed companies and combine smaller point solutions into larger platforms that can become IPO-ready.

Data Points: Green Spring start date: 2011 - Hunter joined Green Spring in 2011 after an internship and later became a partner. StepStone acquisition/combination: 2021 - Green Spring combined with StepStone in 2021. Original platform start: 2001 - Hunter says the team has done direct, fund, and secondary investing since 2001 under Green Spring. Team size: about 80 people - Hunter cites an investment team of roughly 80 people supporting LP diligence and relationship coverage. LP ownership target for smaller funds: 10% to 15% - He says smaller seed funds often aim for this ownership range, which can be easier to achieve in fund sizes of 50 to 150 million. Typical fund size for emerging managers: $50 million to $150 million - Hunter references this as the range where ownership math is often more straightforward. LP over-allocation: too much unrealized NAV - He says LPs are over-allocated to the asset class and carrying too much unrealized value on paper. Venture growth rates now expected: 30% to 60% - He contrasts current venture growth demands with prior years when 75% to 150% may have been expected. Historical venture growth expectations: 75% to 150% - He references prior-year growth rates that the market used to demand more commonly. Strip sale portfolio slice: one third - He defines a strip sale as buying a third of an entire GP portfolio. Remaining portfolio upside after strip sale: 70% - He says the GP retains upside in the remaining 70% of each company after the strip sale. Typical strip-sale timing: years 8 to 10 - StepStone generally does strip sales late in a fund’s life. Typical strip-sale hold period: 4 to 5 years - Hunter says hold periods are usually four to five years. Venture data monitoring cadence: every 3 to 6 months - He says the team performs checkups with funds on this cadence. LP base transition point: fund one to institutional - He notes that managers often move from high-net-worth LPs toward institutional LPs as they mature.

Pivotal Quotes: "We don't define ourselves as a fund of funds. We define ourselves as a multi-strategy venture platform that does all three of these areas through different strategies, led by the same team." — Hunter: Explaining StepStone’s identity and why combining fund, direct, and secondary investing matters. "We're looking for scenarios where they're typically already involved in the business, they want to put more to work, they want to co-lead or they want to invest meaningfully above Pro Rata, where we can then come in and be that lead that sets the price, the terms, and the structure." — Hunter: Describing how StepStone approaches direct deals collaboratively with existing GPs. "There were just too many companies funded in every subsector. The good private equity firms are going to start putting some of these together and getting synergies from it and also creating more platforms instead of point solutions." — Hunter: Discussing market consolidation and why private equity may increasingly buy venture-backed companies.

Implications: For LPs and managers, the message is that capital is scarcer, selection is harder, and liquidity matters more. Venture winners will need better unit economics, stronger LP networks, and more flexible financing/secondary structures to survive the current reset.