Spark Capital raises management fee, forgoes offsets on new growth fund

  • Spark Capital targeting $500 million for growth investments
  • New fee offers LPs smaller post-investment-period reduction
  • Firm’s roster expands by nearly half between fundraises

Spark Capital slightly increased the management fee on its second growth capital fund, targeting $500 million, documents released by Los Angeles City Employees’ Retirement System show.

Spark Capital Growth Fund II is charging limited partners a 2.5 percent annual management fee on committed capital in the first five years of the fund’s life, according to LACERS documents. Afterward, the management fee falls by 10 percent each year.

The venture capital firm’s first dedicated growth fund, which raised $375 million in 2014, reduced the 2.5 management fee by 15 percent each year, a 2014 LACERS memo says. A smaller annual reduction results in higher management fees for limited partners during the later years of the fund’s 10-to-13-year life.

General partners will collect 25 percent of the fund’s profits as carried interest. As with its previous growth fund, the firm’s share of the carry would swell to 30 percent should Fund II return more than three times its committed capital.

Fund II has no preferred return and no fee offsets, according to the LACERS report.

It is unclear whether Spark Capital offered LPs management-fee offsets or a preferred return on its first growth fund, though the latter is less common among established VC funds. The firm’s 2008 flagship venture fund offered management-fee offsets for any directors, consulting and breakup fees obtained through its portfolio companies, according to a LACERS memo from 2007.

The change to the management-fee structure is likely related to the firm’s growing headcount. Megan Quinn, formerly of Kleiner Perkins Caulfield & Byers, and former Redpoint Ventures growth-stage investor Alex Clayton joined the firm in the past year. Spark Capital’s headcount of officials, managers and professionals grew almost 50 percent between fundraises, according to a workforce composition report included in LACERS materials.

In-demand PE and VC firms are exerting more pressure on certain GP-friendly fund terms, several sources have told Buyouts. Advent International eliminated the preferred return on its latest $13 billion buyout fund, which would entitle the firm’s principals to carried interest even if it yields a low single-digit return. Vista Equity Partners spread key-man risk across two people in its newest flagship fund, rather than having only one key man, founder Robert Smith, as it did in past funds. Some LPs say broadening the key-man group in a fund represents a weakening of key-man protections.

Spark Capital is likely facing strong demand as well, in light of its earlier performance. The firm’s previous two flagship funds netted internal rates of return of 52.1 percent and 30.9 percent, respectively, LACERS documents say. The first growth fund is in its investment period and has yet to deliver meaningful returns.

LACERS re-upped $15 million to Fund II, according to its Oct. 25 meeting materials. The $14 billion retirement system committed $10 million to Spark’s first growth fund.

Spark Capital’s track record includes investments in highly valued companies like Slack, a widely used messaging service, as well as social platforms like Twitter and tumblr. The firm has offices in San Francisco, New York and Boston.

Action Item: LACERS materials relating to Spark Capital:

A man cycles on the Venice Beach boardwalk in Los Angeles on Sept. 13, 2016. Photo courtesy Reuters/Lucy Nicholson