Since the slowdown of IPOs a few years ago, limited partners who invest in venture capital funds have faced a significant challenge: a lack of liquidity. This issue has been particularly problematic for wealthy individuals or small family offices that manage the assets of the affluent and have made substantial investments in VC funds.
One such individual affected by having funds locked up in venture capital is entrepreneur Mike Hurst. After selling his payments startup, Exactuals, to City National Bank in 2018, Hurst invested a large portion of the proceeds from this exit into technology stocks and venture funds. When tech stocks crashed in 2022, Hurst found himself without enough free cash to support his VC fund commitments.
Hurst stated that he faced multiple capital calls and new investment opportunities, but he was hesitant to take drastic actions such as mortgaging his house, taking a margin line, or selling stocks at a loss. This experience led him to conceive a credit product that allows limited partners to borrow funds secured by their LP position in venture funds.
Hurst transformed his concept into Turbine, a debt platform aimed at limited partners in private equity and venture capital. Turbine is emerging from stealth with an announcement of raising $22 million in equity funding, co-led by Alpha Edison and TTV Capital, with participation from Fin Capital, B Capital, and Sozo Ventures. Additionally, the company has secured up to $100 million in debt from Silicon Valley Bank to support its loan-making activities.
Turbine offers limited partners the ability to access funds using their fund stakes as collateral, similar to how a home equity line of credit leverages home value or a margin line uses stock holdings. Gardiner Garrard, co-founder and managing partner at TTV Capital, expressed enthusiasm upon hearing Hurst’s pitch for the startup. Garrard noted past instances where limited partners sought liquidity, yet there were few viable options to provide cash to a single investor in a fund.
One alternative was to sell some stock in a portfolio company on the secondary market, but this could mean selling an asset prematurely for the benefit of only one limited partner. Another option was for the limited partner to sell their stake in the fund, known as LP interest, but such transactions often involve significant discounts, leading to losses.
Turbine claims to offer investors liquidity based on the appreciated value of their position in venture funds without sacrificing future potential gains. For instance, if an LP’s initial $3 million investment in a fund has grown to $10 million, they can use the $10 million valuation as collateral for a loan. However, these loans come with a downside: a high interest rate currently around 9%.
Despite this, Garrard argues that this rate is still “very reasonable” and more cost-effective than selling the stake on secondary markets, which may result in a loss or discount. The initial customers of Turbine are the five venture firms that supported its equity raise. These firms’ general partners are already offering their LPs access to Turbine’s credit, with plans to extend this product to more VC funds following the announcement.
Garrard expressed surprise that such a solution hadn’t been available to LPs earlier.
