Nodem: liquidity for emerging market VCs

This interview was conducted and edited by Timothy Motte.

Biography

Alex Branton is the founder of Nodem, a new fund freeing up liquidity for LPs and GPs investing in emerging markets.

Prior to Nodem, Alex was a partner at Sturgeon Capital and previously an investor at Cambridge Associates.

What problem is Nodem solving?

For the past decade, VCs in emerging markets (EMs) have enjoyed a sharp increase in LP funding, culminating in a 2021 peak. While billions in value have been created, liquidity has been hard to come by. 

Many funds are nearing the end of their fund life and need to return capital to their LPs. Unfortunately, many of the companies they’ve invested in haven’t been acquired or gone public just yet. This creates a structural blockage, a clog, which hampers the flow of new money into the asset class. 

This creates a conundrum. Maturing funds need to return capital to LPs, but GPs want to avoid accepting sharp discounts for their fast-growing winners just for the sake of liquidity.

Further, whilst LPs need liquidity to re-up, they want to maintain exposure to the fund's performing companies.

The whole situation isn’t abnormal, per se. EM or not, there is a significant mismatch in the arbitrary length of VC funds (10 years) and the practical reality of how long outlier businesses take to exit (more than 10 years). 

EM VCs face a problem that VCs in developed markets (DMs) have already faced. However, EM VCs don’t have access to the liquidity solutions DM VCs have access to.

Hence Nodem.

Why are these funds taking longer than expected?

Those raising VC funds deferred to the industry standard 10 (+2) year fund lengths, designed for a pre-2010s era where that exit timeline was proven.

That has changed. It will be 15 years on average before most funds are close to fully realized. It just takes a longer time for many companies to scale and exit - true of both EM and DM. 

In EMs, a generation of new LPs entered VC with limited vintage year diversification and an expectation of substantial flows within 5-10 years. It’s taking longer than planned. A significant duration reality check is in order, which is now hampering fresh reinvestment into our ecosystems.

How have other, more developed geographies solved this issue?

The US saw its first wave of major secondaries players emerge in the 1990s. These firms had multiple ways of providing VCs with liquidity: buying out LPs directly (LP-stakes), selling off underperforming assets and migrating performing ones to a new fund (GP-led, continuation funds) or NAV financing (lending the GP money, with the fund’s assets as collateral). 

In DMs, such solutions exist both for private equity (PE) and VC funds. With time, secondaries have gone from a cottage industry to an established one. Today, intermediaries such as Evercore have branches dedicated to those transactions. More intermediaries means more liquidity, facilitating secondary transactions.  

It’s interesting to note that the biggest VC secondary players emerged out of periods of turbulence, such as Industry Ventures (post dot-com bubble) and Gsquared (post 2008 financial crisis). 

Don’t EM VCs have access to similar liquidity solutions?