NEA heads for close of innovative secondary process

New Enterprise Associates is nearing a close for a process to spin out startup investments from older funds into a new pool managed by one of its executives.

The process is one of several run by high-profile investment managers using the secondary market to provide liquidity to investors in older funds and sort out long-held investments.

Other such recent secondaries include those run by Providence Equity, TPG and Warburg Pincus. 

NEA’s process is one of the largest ever in the venture-capital world.

Expected to raise $1.4 bln

The deal is expected to close in the next few weeks, three sources told Buyouts. It is expected to raise about $1.4 billion, higher than initial estimates of $1 billion, sources said.

Goldman Sachs is lead investor on the deal, which will result in the creation of a new firm managed by NEA GP Ravi Viswanathan. The executive is leaving NEA as part of the process and the new firm will manage the investments.

Hamilton Lane is also part of the investor group in the deal, which will buy stakes in about 20 companies from older NEA funds. Those stakes will be transferred to the new pool.

The investment may also include a portion of capital for follow-on investments.

Pricing for the stakes is in the range of the low-90 percent of net asset value, sources said. The reference date NEA is using to price the assets is unclear. Secondary pricing is set using NAV pegged to a certain date, usually lagging by a quarter or two. 

Lazard is secondary adviser on the deal.

LPs in the affected funds will receive distributions from the sale of the companies. NEA also offered LPs in the funds the opportunity to invest in the new fund, sources said. NEA received mixed support from existing LPs on reinvesting, sources said.

NEA doesn’t need LP approval for the deal because the firm is selling investments into a fund to be run by an executive who will no longer be employed by NEA, sources said.

This makes the firm non-conflicted, two of the sources said.

LPs have some concerns about aspects of the deal. One LP said they don’t get a vote on the deal, so they have to accept the sale of strong assets at a discount, which the LP said is frustrating.

Two LPs questioned how the firm chose the investments that are being targeted in the deal, with one saying NEA “cherry-picked” the strongest companies to move out of older funds.  

“We’ll never know how that conversation went within NEA on why they picked the assets they were selling,” one of the LPs said.

One of the LPs said some buyers who declined to participate in the deal thought that pricing was too high and that NEA picked weaker companies out of the funds.

The fact that both sides questioned pricing is probably a good measure that pricing is in the proper range, the LP said.

“You’re never going to have a deal that everyone loves on both sides of it,” the LP said.

23andMe

Companies were chosen in part based on who led the investments and whether it made sense for NEA to hold them considering workload and whether the firm would continue to support them, sources said.

For example, one of the companies included in the deal is 23andMe, in which NEA first invested in 2007, sources said. One of the lead partners on that deal, Patrick Chung, left NEA in 2014.

“No one in the firm is shepherding it and building it,” one source said of 23andMe, explaining why that company was included in the deal.

The companies included in the deal “need more runway, more involvement, than NEA will provide at this time,” one of the sources said.

Action Item: Read NEA’s Form ADV here: https://bit.ly/2Oeo9AF