As IPOS slowed down its liquidity several years ago, limited partners investing in venture capital funds encountered a huge problem: Lack of liquidity.
The lack of cash returns is especially troublesome for wealthy people or their small home offices (managing the assets of the rich), which makes a lot of investments in VC funds.
For entrepreneur Mike Hurst, locking money into venture capital is a big problem. After selling the exact goods, he founded a payment startup to City National Bank in 2018, where he invested most of the proceeds from his exports in tech stocks and venture funds.
Then, tech stocks crashed in 2022, and Hurst told TechCrunch that he didn’t have enough free cash to support his VC fund commitments.
“The company keeps making large-scale calls and new investments. I want to do it, but I don’t want to mortgage the house, take up margin lines or sell Amazon for $90, and I knew it was backing $210,” he said.
This experience has led Hurst to create the idea of a credit product that will allow limited partners to borrow funds secured by their LP position in venture capital.
Hurst turned his vision into a turbine, a debt platform for private equity and venture capital limited partners. The company will stand out from invisibility on Friday and announced it has raised $22 million in equity funding co-led by Alpha Edison and TTV Capital and has participated in Fin Capital, B Capital and Sozo Ventures.
The company also received up to $100 million in debt from Silicon Valley Bank to support its loans.
Turbines provide limited partners with a way to use their fund shares as collateral, just as household net worth uses home value or margin line using lines of credit held by stocks.
Gardiner Garrard, TTV Capital’s co-founder and managing partner said that when Hurst threw him into the startup, he was immediately excited about Turbine.
“I had a lot of events, and the record was close to me, asking about liquidity,” Gallard said. However, there weren’t many good options to help individual investors get some cash.
Garrard explained that TTV could have sold some stocks in a portfolio company in the secondary market to help investors, but he didn’t want to sell assets early to meet the needs of just one LP.
Or, LP could have tried Sell their shares Garrard said (called LP interest) is in the fund, but these transactions “bring a considerable discount”, meaning the LP may have to sell the shares at a price below its value.
Turbine claims it provides investors with liquidity, i.e. recognition of its position in venture funds, without giving up on future upside potential. For example, if the LP’s initial $3 million investment in the fund had grown to $10 million, they could use the $10 million valuation as collateral for their loans.
The downside is that these loans are not cheap. Interest rates are currently around 9% (currently, the best rate is about 7.5%, so many loans today are not cheap.)
But Gerrard believes that this can still be considered “very reasonable and much cheaper than selling costs”, shares in the secondary market, or even just discounted prices.
Turbine’s first customers were five venture capital firms that supported its stake increase. Hurst said the companies’ total partners are already offering LPS access turbine credits, adding that it plans to use its products for more venture capital after today’s announcement.
“I can’t believe we don’t have such a thing,” Gallard said.
