LPs restless as funds hang on to IPO stock

If you like a company when it is private, why not continue to like it when it is public?

Such is the reasoning behind the current trend of rising holding periods for post-IPO stocks. But as the trend reaches new heights it is being met with an expected response: increasing concern among LPs eager to see distributions sooner rather than later.

Tensions have not yet reached a boil, but they aren’t likely to cool anytime soon.

A VCJ examination of 31 venture-backed technology IPOs from 2010, 2011 and the first quarter of 2012 found 45 venture firms with major post-offering stock positions, including such top firms as Sequoia Capital, Benchmark Capital, New Enterprise Associates and Kleiner Perkins Caufield & Byers. VCs who have been around the business for years say the practice is more widespread than in the past.

Certainly, the volume of the holdings is higher. Together, the 62 positions add up to an astonishing $8.58 billion in value, based on Sept. 11 share prices. (VCJ relied on data from Thomson Reuters, its publisher, and Securities and Exchange Commission filings for its study.)

Several holdings are massive in size. NEA held 87.45 million shares of Groupon as of June and Kleiner Perkins Caufield & Byers had 60.1 million shares of Zynga as of April. Institutional Venture Partners held another 30.8 million share of Zynga, as of April.

Employees and guests of Groupon ring the opening bell in celebration of the company’s IPO at the Nasdaq in New York, Nov. 4, 2011. Nearly two years after the famed $700 million IPO, New Enterprise Associates still holds 87.45 million shares of the company.

For its part, Crosslink Capital still retains 30 million shares of Pandora Media, according to an August filing with the SEC.

The list runs well beyond these marquee names. Firms, including Battery Ventures, Bessemer Venture Partners, Austin Ventures and Accel Partners, hold or held until recently substantial positions in Bazaarvoice, Homeaway, Jive Software, Millennial Media, ServiceSource International, ReachLocal and Responsys.

In the past, “most firms got rid of the stock after the lock-up period expired,” said Greg Bohlen, a managing director at Morgan Creek Capital Management. “Now, not so much. They are much more willing to increase the holding period of a stock if they think there is value above and beyond what the public markets are assigning it.”

The explanation for the trend is fairly straightforward. With the stock market in a cyclical upturn, venture capitalists want to take advantage of the rising tide. “There is a general market excitement,” said Douglas Leone, a partner at Sequoia Capital, “It’s one of these things that is momentum-based.”

But the analysis is company specific, as well. The market rise has been strong, but it has not benefited every company equally. Public market buyers are picky and inefficiencies appear in the valuations of thinly-traded small-cap stocks, particularly those with little or no research coverage. IPO valuations often don’t have froth to sell into.

Most firms “are much more willing to increase the holding period of a stock if they think there is value above and beyond what the public markets are assigning it.”

This story first appeared in Reuters Venture Capital Journal. Subscribers can read the original story here. To subscribe to VCJ, please email Greg.Winterton@ThomsonReuters.com

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