E647 | Kristaps Ronis, ION Pacific: The Rise of Structured Secondaries in Venture

0:00Hi, everyone. Welcome to this episode of the UVC podcast. Today, I have Chris Tapps Ronas. Chris Tapps has a very interesting profile. mix between global and European focus in this episode. This is going to be kind of an interesting one. So please stay tuned. Chris Stapps is a partner at Iron Pacific. Iron Pacific is, and we'll talk all about them in detail. So I'll be quite brief about it. But they're actually right now raising their fund three. They're still deploying. So they're actively investing in the market. So if anything here is interesting, you can definitely reach out to them. Their AUM is approximately 550 million euros.

0:36roughly here with rounding ups and effects and whatnot. They're based in, they're HQ in the US and LA. They do have a very strong European presence in Switzerland. I consider that Europe, by the way. And also in Asia, Hong Kong, they're really focused on Series B +, so BCD, tech companies, global portfolios, everything we love. They invest in the US, North America, of course, Europe. Obviously, that's why we're here. Israel, Southeast Asia, et cetera, et cetera. But generally, I think the core message here is I am Pacific as a tech journalist, but really nailing down on that B2B software and fintech space.

1:12Before we start the show, a quick note. If you're building or running a fund, you know it takes the right partners. At EUVC, we only work with sponsors we truly believe should be part of your tech stack. Please do take a moment to hear about them. And if you do, reach out, mention EUVC. It's the best way you can support what we do. Thank you so much. First off, Ace Alternatives. Every fund manager needs clean operations behind the scenes. From fund admin to tax and compliance, ACE handles it all across VC, PE, private debt, and real assets. They're trusted by some of the best investors in the world.

1:46And if you want peace of mind and a scale-ready back office, ACE should be part of your step. Finding deals and managing your portfolio is at the heart of running a fund. Synaptic helps you discover status before others do. And Portfolio IQ keeps your portfolio data sharp and ready for LPs. Together, they're essential tools for modern fund managers. When it comes to legal, you need a team that truly knows venture. Hainspoon supports LPs, GPs, startups and scale-ups across the full fund lifecycle. Smart managers make Hainspoon part of their stack. We have two at EUVC. Tech BBQ. Oh my god, who doesn't love BBQ?

2:20Europe's startup scene meets the loudest, friendliest family reunion ever at Tech BBQ. From Nordic founders to global VCs, this is where ideas catch fire and relationships get real. If you're building or backing in Europe, Tech Barbecue is where you want to show up. And hey, if you've got a big fun announcement coming up, want to hit the headlines or just want to tell you a story about, do reach out to us because we'd love to help. And we've got some pillar partners to help you get in the right media places. They've held us land Bloomberg, CNBC, Financial Times, Forbes and many more for the EUVC Summit.

2:52And we'd love to do the same for you.

3:10This show is not investment advice and the hosts of this episode may be invested in the funds and companies featured. Chris Tabs, I could say quite a bit more about you by reading my notes here, but I think it's better to just reel you in, say welcome. What would you like to say, like quick one liner or couple of liners about you and Ayan for people joining in right now? Absolutely. And thanks, David, for having me here. What I would say, I'm Chris Absronis. I'm a partner at I Am Pacific. We are a global investor, as you rightly pointed out, focused solely on providing liquidity to the venture ecosystem through structured investments and secondary investments.

3:52I run our European practice and oversee most of our European transactions, both on the portfolio levels as well as single company transactions. Their model is maybe different from some of the secondaries models and episodes we've done so far. And so that's why this episode is being marketed under this topic of structured secondaries. We'll get there in a minute. Let's start as we always do. Chris Stapps, how did you end up where you are today? Give us a quick flavor of who are you, what have you been up to, and what got you into this, I like to call it the wonderful world adventure. The wonderful world adventure, exactly.

4:32So look, David, I was born and raised in Latvia, started my career there as well in finance in a relatively standard way. I was a foreign exchange analyst up to a point when I decided I completely wanted to change the trajectory of my life. Moved to mainland China for two years. I was doing a full-time program at Peking University. They have a wonderful finance program there. And I was living in Shenzhen, in a very rapidly developing city in the south of China. And that gave me a fantastic perspective on life, on finance and business and on how quickly this world is developing overall. After my two years in China, I didn't want to leave the region.

5:20I moved to Hong Kong, started my career in investment and merchant banking. Again, a pretty standard way to continue after a master's studies. Not long after me starting my stint there, the bank was acquired and the two co-founders of Iron Pacific, who are back then the co-heads of investment and merchant banking, invited me to start a new firm together with them. And that was Iron Pacific. So fast forward 10 years, we're a global investor with three offices across Asia, Europe, and the United States. We're one of the leaders in the venture secondaries and structured secondaries in particular.

6:01And I I became a partner a few years ago and oversee our European operations. So before we go on with the usual flow of our episode, structured secondaries, right? So that's probably going to be, I don't know, I haven't decided yet, but it's probably going to be on the title of this podcast once it goes out, right? Want to give us the quick, very brief kind of teaser? What does that mean so that our listeners can decide, I'm going to stay tuned in or not? Absolutely. So unstructured secondaries, we all know what a regular way secondary transaction is. There's a buyer and there's a seller of shares or of a portfolio.

6:41But what we oftentimes see in the market, there are a couple of things that happen. Number one, owners of assets don't generally want to sell their best assets in the secondary market. Number two, they have very different views on the value and pricing of those assets versus the secondary buyers. And last but not least, oftentimes owners of these assets do not want to be seen in the market as sellers. And that is exactly where a structured secondary transaction comes in, where without purchasing the asset and taking over full control of the asset, We are able to provide partial liquidity to the current asset owner and engage in an agreement on splitting future cash flows from that asset.

7:33Therefore, they're not selling the asset. They're getting upfront liquidity and they're getting future upside from this asset. Yeah. Okay. We're going to dive deep into that. So if that's interesting, stay tuned. Before we get there, our standard question as well. Almost every single one of our, I think it's now almost 600 guests have answered this, if not more. Biggest learnings in venture, Chris Dubs, what have they been? I think number one, it's the absolute paradox in venture capital that is really fascinating where the industry as a whole is full of the brightest minds out there. Solving the most complicated and innovative problems out there.

8:17building technological breakthroughs in a very creative way. That being said, the financial innovation in this industry hasn't fully kept up with the pace of innovation, right? The top three instruments that are still available to the venture world are common equity, preferred equity, and a bit of venture debt. And if you compare that to any other asset class, any other sector where you have very strong presence of derivatives, structured credit, various hybrid instruments that help to manage liquidity, manage risk. Venture has really lagged behind. And that's one definitely learning that I had.

9:04And that's something that we at HyoPacific are working hard towards because I see a big opportunity there in bringing these various liquidity solutions and creative financial instruments into the world of venture. Do you have any thoughts around why that's the case, if at all? In the sense of like, why do you think, you know, you gave some very concrete examples, right? Derivatives, I don't know, structured solutions, et cetera. Why it's the case we don't really see it that much in venture? Because we see it in private equity, our older brother, as I'd call it. Yes, absolutely. I think one of the reasons why we don't see these more sophisticated instruments in the world of venture is that the companies, the underlying companies in these portfolios are in many cases, pre-revenue, in many cases, pre-product.

9:55And it takes a certain kind of skillset and knowledge about the industry and the types of underlying assets to be able to comfortably structure and underwrite these various types of instruments in this asset class. yeah so kind of what you're saying in other terms there is a limit i'm i'm i'm putting words in your mouth which is always dangerous there's there's a limit to the level of complexity we can do especially at the early stages which changes as we move on and here to talk a bit about what you guys do right b plus right okay now we're now we're getting to a point where these these things start making sense and your point being well still there we don't see it that much absolutely still we don't see it that much.

10:43And yes, definitely Series B plus, Series C, we are starting to see some innovation, but definitely not in the earlier stages. Okay, let's move on to a second learning, which I think the topic of more complex capital structures is something that we can focus it around. Absolutely. So that's exactly the other end of the spectrum, right? So overcomplicating things at a later stage. And I think you put it really nicely in one of the other episodes, it being complex capital structures is a silent killer of some of these companies, right? So when a company raises capital, particularly in a very competitive environment, they are oftentimes pushed to maximize valuation, pushed to maximize round size, and incentivized to take on massive amounts of debt, which in the short run sounds great because you're extending the runway, you're opening up a wide array of opportunities for the company, such as M &A opportunities and so on.

11:51But over time, if you layer over these various instruments on top of each other, you end up with a cap table that is very complicated to navigate, almost impossible to navigate. And that creates strange incentives for these various participants. And the problem is when the market slows down, you can see these capital structures and excessive amounts of debt really strangle these businesses and bring them to a point where they need to do restructurings, recapitalizations, pay-to-play rounds. And we've seen this more than enough, right? In some public cases such as get to error refux and many many more happening behind closed doors love your take on something it's something i think about every now and then and and even even today this morning i'm part of this um this whatsapp group which has a bunch of mostly mostly i would say that most of them fall in the bucket of high net worths um who do a bit of venture my playbook as someone who loves venture and studies venture but is not i'm not a fund manager right i'm not meeting startups and and running an investment shop every single day so my playbook is quite simple you know i love the early stages i think that's where you can really get the outsized returns for anything else but outsized returns i just go into public market investing like keep it simple super plain vanilla right so my playbook is i'd rather have my money at work into funds because i can scale that uh without spending too much time uh and i can meet everyone or almost everyone in Europe quite quickly.

13:29And then over time that compounds and I'm able to actually have quite good performance. But a topic that I find myself having a hard time answering and this morning was the same case. Obviously, there's a lot of dispersion in early stage venture, even when you invest into funds, as we all know. And so oftentimes I see the answer to that being, no, no, no, but do slightly later stage. Just do slightly later stage. And my question to you being, Here you mentioned that the complexity of these deals adds a new layer, in the sense that in early stage, we don't really have this. So when you meet, if you meet people like myself, so people who love venture, not necessarily fund managers, their day-to-day business is not picking investments per se, but they want exposure to, let's call it again, our wonderful world of venture.

14:19How do you think they should think about it? Would you dare say anything? because this early stage, late stage conversation, I hear it a lot in this profile of individuals. And I always struggle to have a strong opinion there. It all always depends on your intentions and objectives, right? If you're looking for capital preservation, you typically don't invest in venture. If you're looking to make outsized returns, then I would say it really boils down to a couple of things, right? Rounded out portfolio and a bit of diversification, right? You want to get some of those early stage names. You want to catch them early through some early stage funds.

15:05You want to continue supporting them through the mid and growth stage. And maybe you're even able to put together enough capital to put some money into a late stage pre-eo fund. And that's one way to capture the whole value chain. The other option is obviously fund the funds, right? Where you get a much more diversified exposure to venture. And the last option would be also secondaries, which provides exposure to venture in a very diversified way, but with a shorter J curve and shorter time to liquidity as well. This is when you see Chris Stapps is running an institutional firm because he was very polished in his reply, which I appreciate.

15:49Final learning, which is a good way to wrap up this section. Final learning, DPI is king, right? Distributions, real cash on cash distributions is what everyone is looking for in this day and age. Previously, it was different when in 2019 to 2021, the venture was only going in one direction, up and to the right. You could buy into the quote-unquote markets and still write a good amount of paper returns, but the tides have turned. Liquidity has been scarce. IBO markets have been closed. And the lack of liquidity and the lack of distributions is really impacting all and every ecosystem member. And therefore, DPI is king, cash is king.

16:40And the existence of many of the venture firms, the existence of many of tech companies really relies on the flywheel of liquidity continuing to spend. And you've just set the stage for the secondaries conversation, right? Because this is the, I'm not going to say it's the ethos of any secondaries player, but it's very close to it. So, secondaries has been getting a lot of attention lately, right? Of course, the DPI conversation being the reasoning for it. But I think it's safe to say you guys, as an example, right? You guys have been around since 2015. So, let's start with that. In the last 10 years or so, roughly, right?

17:24What have you seen change, right? In terms of the secondaries market? Yeah. First and foremost, I would say it's awareness. Awareness that these instruments are available in the market and they can be used to achieve a variety of goals for the various ecosystem players, the GPs, the LPs, and the founders. So number one, people have become aware that we've all seen private equity players doing secondary transactions for the past 40, 50 years. However, in venture, these deals only started appearing post 2000 and more actively post 2000. Right. Number two, it is the types of actors that are looking for liquidity.

18:13When the market was really strong and liquidity was not an issue and IPO markets were open, I would say 2016 through 2021, we saw a lot of single company deals. opportunistic transactions, sellers opportunistically looking to exit some of their holdings, and a lot of founder liquidity solutions, right? Because founders always do the most work and get paid last. So they're always in constant need of liquidity. Now, overseeing post-2022 in the US and post-2024 in Europe, it's really a big focus on fund-level transactions. Funds have come to realize that they need to generate that DPI to keep their LPs happy and to keep the lights on.

18:58And therefore, that's a substantial change. And number three, we're also very happy to see more and more secondary and dedicated secondary players popping up on the map and evangelizing the same narrative that we've been evangelizing for the past 10 years that secondaries can be used in a smart way to benefit everyone in the ecosystem. You also had some notes around continuation vehicles, which we haven't touched on. I'd love to hear you comment on that as well, because I'm quite young in the industry, I'd like to say. I've been in it for a while now, but still, I think I'm quite young. And it's a topic I've heard a lot about, but I haven't gotten a lot of exposure to.

19:40So I'd love to hear your take there. Absolutely. And what I can say is, historically, GP-led transactions such as continuation vehicles and other portfolio deals have been about 50 % of what we do, the other 50 being single company transactions. Now in 2025, especially in Europe, about 70 % to 80 % of the deals that we see in Europe are portfolio-level deals and especially continuation vehicles, right? So just to be clear here, we're talking about deal flow, not deals you guys end up doing, correct? Both, actually. Okay. Both, actually. Deal flow that we see in the market, as well as deals that we're actively executing and have executed since the beginning of the year.

20:31There's a big focus in portfolio-level transactions, especially here in Europe. I call it jokingly among friends, 2025 being the year of the European continuation vehicles. the$260 million Lake Star continuation vehicle that was announced last week I think is just tip of the iceberg when it comes to the overall market activity we're seeing more and more GPs trying to close transactions coming to market from the summer break through this instrument and yeah generating liquidity that way we've done quite a few quite a few podcast episodes on let's call it the most common or commonly discussed secondary type, which is company secondaries.

21:20We've spoken a tiny bit about funds or let's call it GP level secondaries, right? Whatever that means specifically. We haven't spoken at all on this podcast around the structured solutions. And you gave us a bit of a one-liner in the beginning. So tell us a bit about what do those deals look like and feel free to share a bit of meat there as well. in terms of why the need for these specific solutions from a buyer and seller perspective, right? Because I think that's super interesting for us to better understand, especially as you have said, it's something that we're starting to see more in Europe.

21:57So probably many haven't really seen these deals happen yet. Yeah, so what we're seeing is a lot of GPs coming to market, looking to generate DPI, and figuring out the best way to do this between regular way secondary sales of portfolio companies, strip sales, continuation vehicles, etc. We're also seeing a bunch of situations where a structured solution could be more appropriate. For example, situations where the GP needs to deliver liquidity to their LPs because the LPs are demanding it. but they feel like selling an asset or assets from their portfolio could be quite premature. They would be leaving a lot of value on the table.

22:42Number two, around these more promising assets in the portfolio, they feel like the market isn't pricing them right. And the price that they might get in regular way, secondary market, doesn't really represent the expectations that they have for these assets. Number three, what we're also seeing, and that applies to both venture capital managers as well as corporate venture capital managers, they enter these assets, promise these founders long and happy marriages with their companies, but now it's time to potentially part ways. They want to generate liquidity from these assets, but they don't want to be seen as a seller in the market.

23:26And therefore, what we're bringing in to the venture world is a structured secondary solution where we come in, we look at a portfolio, and we're able to provide a partial liquidity to the GP that they can distribute to their LPs without them selling any of the assets to us, without handing over any of the assets to us. So it's, I would say, a discreet and bilateral conversation that we have and the bilateral agreement that we enter where we provide partial liquidity and we split future distributions from this asset base where they have the opportunity to get partial liquidity now and participate in the ongoing upside while continuing to manage the portfolio from the same vehicle where it's currently held.

24:20So you're saying that the structured approach solves something that the unstructured secondaries can't really do, which is preserving upside, preserving control, and signaling the market the right way, right? So the thing about the seller not really wanting the market to know, sounds a bit too good to be true. What's the catch, Chris? What is the catch? I think it takes a bit of a sophisticated GP to really understand the strengths and benefits of this structure and how to explain it to their LPs. Because if I'm saying, David, I'm coming to you and buying this asset at, you know, 85 cents a dollar, that's a very easy explanation.

25:06My LPs will get 85 cents on every dollar of NAV. And it's a very simple structure. but now i say hey well what we're going to do is we will provide you with 50 of value up front and then from now on you will get 50 of the upside there's a bit of uncertainty wow i'm getting only half of the value now and there is a bit of an uncertainty element as to the timing and the amount of future cash flows so the gp has to have a strong relief in the upside of the portfolio in order to enter this type of transaction. And it takes a bit of LP education on that front as well. Any words of advice if I'm either a GP listening to this?

25:50My fund is on year six as an example, which is a weird time. It's a tough time. I find oftentimes to do any type of secondary. It's a bit too early in some cases, at least. But if I'm a GP listening to this, I find this interesting. what would your advice be to this persona in opening up this conversation also with their LP base and even maybe within the team, right? Of course. And then also the flip side question, I'm an LP in a fund, but kind of wishing there was some kind of liquidity now. Advice on opening up that conversation with the GP in case. Let's start off with one stat that we recently looked up on PitchBook, we are looking at 2014 vintage, right?

26:32So 10 years ago, the median DPI for that vintage is 0.96. So LPs have been locked in into a 2014 fund and they barely made their money back. Lead 11, making that outsized return that we're all waiting for. So I think starting these conversations from the LP side are exceptionally easy. David, where is my money? And from the GP side, I think it's very similar. Look, guys, we started this fund a while ago. We were hoping for a 2024 IPO for the key assets, then a 2025 IPO for the key assets. Now it looks like it might be 26 or 27. We're going to be running into end of fund life issues, and we need to think about how we appropriately manage liquidity and dpi also knowing very very well that we'll need to raise a subsequent fund in the future and we want a substantial amount of re-ups from our existing lps that's typically how these conversations start internally they're very practical in nature there's a small detail hidden in your notes around the structured alternatives being easier to negotiate when there's a higher bid ask spread, which I thought is really very concrete, very specific and very interesting.

27:56I hadn't thought about it. Why is it the case? Absolutely. Right. So, and it comes into play in a broad range of situations. The most typical one is when the company has last raised in 2020 or 2021, so you had a$2 billion valuation. And we now strongly believe that the fair value is closer to$600 million. But the manager is still valuing it at$2 billion, right? So we come in with our offer, which is essentially$0.30 on the dollar, not entirely palatable to the GP, not at all palatable to the LBs that still strongly believe, by the way, the assets are valued at 2 billion. Structured solution helps us a lot in this type of situation because we can say, hey, how about we pay you a proportion of what we believe it's worth and your LBs receive partial liquidity, but you will receive a significant portion of the future upside.

29:00So that allows us to unlock that sticking point between us, the GP and the LP around the missing liquidity. It allows us to invest at a point, at an entry point that is comfortable for us. And it's also saves the face for the GP in their conversations with the LPs to be frank. Is the market at a point where when you guys do these deals, you have other co-investors or do you end up to have having to take the whole deal yourselves? More and more. And we're really happy about this. we're seeing deal partners and co-investors in transactions. And that being said, those are typically the unstructured deals, continuation vehicles, asset purchases.

29:45In structured deals, fund recapitalizations or strip recaps, it's generally us having bilateral conversations and us doing these transactions. I guess that means there's potentially a segment of deals that are missed in a way because it's just, they might be too big or on the other end of the spectrum too small because you guys have a specific sweet spot with your own like fund size and strategy, blah, blah. Do you feel that already? I would say so. In fact, I would say that we are the ones filling the biggest gap in the market right now because, you know, you have the harbor rests and stepstones playing typically 100 million or 150 million plus range.

30:32And it doesn't leave a lot of capital available to the guys, say in Germany, who are running a 40 million euro fund. And now in year seven, they want to do a liquidity solution around. They just don't qualify for the minimum ticket for some of these larger private equity secondary players, whereas us, you know, we could happily fill that gap. There are also obviously much, much smaller deals that we sometimes aren't able to fill as well. Is that an opportunity for someone to grab, do you think? Or is it too small? Potentially. Let me put it this way. Regular waste secondaries, I don't think there's a real size limit on the minimum side.