Venture capital was a relatively minor part of StepStone’s alternatives strategy when it acquired Greenspring Associates in 2021. The transaction immediately added USD 18.9bn in assets under management (AUM), lifting total venture and growth equity assets to USD 24bn. It amounted to nearly one-quarter of the firm’s total AUM at that time.

The transaction established a global platform of about 70 venture and growth-focused investment professionals. The team has since scaled to about 90, which StepStone touts as one of the largest practices of its kind globally. The intervening five years have also seen venture and growth assets scale to about USD 36bn against an overall AUM of USD 245bn.

“It’s been a big growth vector for the platform at large in terms of the dollars in the system that have been both invested and fundraised globally over the last several years. But the largest growth is in the US,” said John Avirett, a US-based venture and growth-focused partner at StepStone, previously a longstanding general partner at Greenspring.

“The innovation cycle that we’re in – whether that’s artificial intelligence (AI) or deep tech in aerospace and defence – has really propelled a huge amount of investment and fundraising in the ecosystem. We’re a natural participant in that.”

Asia has historically played a minor role in venture and growth deployment. For example, a recently launched non-publicly traded evergreen fund for the strategy, dubbed Spring, has set geographic allocations of 70%-90% North America, 5%-15% Europe, and 5%-15% rest of world.

Venture and growth AUM in Asia currently amounts to about USD 1.5bn. There are 40 venture and growth GP relationships in the region, out of 300 globally, with Southeast Asia, South Korea, and India representing the lead markets.

Fund commitments span seed to late-stage strategies, as do direct investments albeit with an emphasis on growth assets. Cheque sizes range from as little as USD 5m for niche specialists to USD 500m for separately managed accounts.

There is also a large venture secondaries practice. StepStone believes the shift toward AI-deep tech will be one of the most significant drivers of VC secondaries activity in the coming years, both expanding the opportunity set and raising the cost of getting asset selection wrong.

The logic here is that as AI and deep tech companies scale to new highs in valuation, they will tend to stay private longer than otherwise comparable software companies. Their employees, early investors, and fund LPs will therefore face growing pressure for liquidity.

“At the same time, this transition makes secondaries a far more complex market for investors without a genuine information advantage,” Avirett said. “Generic secondary buyers focused primarily on discounts can still find them. However, those discounts may be increasingly concentrated in legacy software assets whose business models are at risk of being disrupted by AI.”

There has been some Asia-based secondaries activity. Standout transactions in the region include StepStone joining Australian superannuation fund HESTA in 2019 to acquire interests worth AUD 100m (then USD 69m) in the debut fund of Sydney-based Blackbird.

Navigating transition

Still, the preference for US venture overall is likely to continue. This is rooted in the view that the software-driven VC activity of recent decades culminated in the 2010s with a geographic dispersion. Software businesses could be built anywhere, allowing fund managers to proliferate globally.

That geographic dispersion represented the end of a technology cycle based on classical computing. The AI-deep tech cycle will therefore, in theory, see capital flows contract to core geographies, especially the US.

Avirett acknowledges the hardware and engineering strengths of Asia in this space, flagging robotics and semiconductors as examples. But this expertise is seen as mostly confined to large established companies – potential partners to Western counterparties but not VC targets.

“A lot of the funding is going more toward North America to try to bring those capabilities to the US. There’s clearly start-up activity in China – not a geography of focus for us – as well as South Korea, Japan, and Taiwan. But there’s just more start-up activity happening in those categories in the US and Europe,” he said.

“Part of that is the deficiency the US has versus Asian nations that have conglomerates doing that very well. The US, as well as certain European states, has just realised that we need to partner continuously in Asia, but we also need to develop our own capabilities.”

The set-up is equally tantalizing and precarious. Big returns and big failures are tied to the cusps of innovation cycles. There will be more political entanglements. Capital requirements will increase as R&D-intensive and asset-heavy models predominate. Due diligence must become more comprehensive.

From the LP standpoint, the pressure on manager selection in venture capital is greater than ever. Avirett said that transition uncertainty in the VC industry broadly has not resulted in a reduction of StepStone’s manager roster, but it is causing some to be rotated out as new sub-strategies are added.

“LPs are looking for firms to really evolve and adapt their team, their strategy, the types of deals they’re making. That’s creating a variety of movements as to which established firms are going to persist and be great in the future and which might drop off,” he said.

“There are a lot of spinouts. We’re seeing younger partners creating new firms and emerging managers. There’s never been a more exciting time in venture.”

Much of the challenge around manager selection in the current environment is the need to go young. AI-native founders are mostly in their 20s. They are unimpressed by established VCs trumpeting homeruns in web, mobile, or cloud. They take capital from their likeminded classmates and colleagues, who have launched funds.

StepStone will continue to back established venture managers while creating more room for first-time funds. Where established managers do receive commitments, they will have demonstrated an understanding of expertise succession.

“We’re making sure there’s a balance at a firm. Before, you would be less likely to trust an investment professional in their 20s with a chequebook. Now, you need them to be in some of the most relevant deal flow on a global basis,” Avirett said.

“When I started in 2005, most GPs were in their 40s or 50s. That actually feels old now in venture. That’s a dynamic where LPs have to readjust their models. Past performance is not as big of an indicator.”

Australia angle

There is some reason to believe that this aspect of the innovation cycle will allow some Asian markets to see increased VC activity. Phil Cummins, a senior managing director at StepStone and a former venture partner with Greenspring, described Australia as punching above its weight in terms of start-up talent on a population or GDP-weighted basis.

Cummins, who is US-based but previously spent 13 years as a private equity professional at Queensland government-owned QIC, has championed StepStone’s VC presence in Australia. He believes the country’s talent edge could serve it well as the local start-up market transitions but still sees the US as the centre of gravity.

“I think the talent will ultimately, like water, find its level. If you’re a world-class entrepreneur, you’re going to find where you are able to best express those talents. A lot of them are going to seriously think about the US versus doing something domestically,” Cummins said, evoking incoming capital gains tax changes that will see many Australian founders pay up to twice as much as before.

“The ingredients are there, including the historical ties [with the US]. But I think it all comes down to the human talent, and where it’s able to find the best opportunities.”

The transition toward AI-deep tech is a particularly acute concern in Australia. Domains such as space and quantum computing have proven discrete strengths locally, but the country’s current crop of VC firms have found little success in terms of realizations outside of enterprise software.

The local poster child for the software era is design platform Canva, one of the assets in Blackbird’s Fund I strip sale to StepStone in 2019. The company, which had been valued as high as USD 40bn in 2021, was reassessed at AUD 49bn (USD 34bn) in August amid concerns of AI vulnerability in the business model. It accounts for most of Blackbird’s AUD 2.3bn in distributions to date.

“Those returns have to come through, and that comes down to the VC firms sizing their funds to the opportunity set and really building portfolios,” Cummins said, referring generally to how local fund managers must navigate the transition away from software-heavy strategies.

“There are definitely going to be some great opportunities that come out of Australia. The question is whether a VC firm can capture enough of those to produce the return. You end up with a scenario where a few firms capture the lion’s share and have great returns, and everyone else is lagging behind because they didn’t get into those deals.”