Venture Firms Going Public
On structure, incentives, and valuations of VC Firm IPOs
This is a weekly newsletter about the business of the technology industry. To receive Tanay’s Newsletter in your inbox, subscribe here for free:
Hi friends,
Last month (and last year), I did a poll on what topics I should write about, and the clear winner was about the idea of venture capital firms going public. A few days ago, Axios reported that General Catalyst is in the early stages of exploring an IPO (and Andreessen Horowitz has hinted at doing the same at some point), and so I figured it was finally time to cover the topic.
It goes without saying but worth reiterating given the topic of this post — the views here are my own and I have no knowledge about the actual plans at any of the firms mentioned.
Traditionally, venture firms have stayed private partnerships, with the management company wholly owned by the general partners of the firm. But this would definitely mix things up, although it wouldn’t be entirely unprecedented, with PE firms such as Apollo, Blackstone and KKR all being public.
So what would it actually mean for a VC firm to go public? Why would a firm choose to take this route in the first place? And how would public markets value them?
Let’s break it down.
What It Means for a Venture Firm to IPO
Venture firms today operate on a relatively straightforward business model:
They raise closed-ended funds (~10 years) from limited partners (LPs), such as pension funds and endowments, roughly every 2-4 years.
They charge management fees (typically ~1.5-2.5% of AUM per year) for overseeing the capital.
They earn carry (typically 20%-30%) on profits above a certain hurdle rate.
If a venture firm goes public, the likely path they would take is that they would sell a stake in the management company (the entity that collects management fees and a share of carry) to the public markets. This means the firm would still raise traditional venture funds from LPs, but a portion of the fees and the carry from all those funds which would flow back to the management company would now be owned in part by the public.
This isn’t unprecedented. Private equity firms like Blackstone, KKR, Apollo, and Carlyle have successfully gone public, creating a roadmap that venture firms could follow.
There are a few key structural considerations as well for venture firms looking to go public that would maximize investor appeal while maintaining operational control.
Governance: A public venture firm would likely use a dual-class share system, ensuring that its founding partners maintain control while giving public investors economic exposure. This approach has been successfully used by firms like Blackstone and KKR, which maintained strong governance control post-IPO.
Regulatory: The firms would likely want to avoid being classified as an investment company under SEC rules, which would impose restrictions on how it operates. To do this, they would typically emphasize that their primary revenue comes from management fees rather than investment income.
Corporate Structure and Taxation Considerations: Private equity firms that went public, like KKR, initially structured themselves as publicly traded partnerships (PTPs) to benefit from pass-through taxation but later converted to C-corporations to attract a broader investor base. C-Corps offer inclusion in major stock indices, making their shares more attractive to institutional investors, though they come with corporate tax obligations.
Below is what the KKR organizational structure looks like:
Why a Venture Firm Would Go Public
Zero of the major venture firms in the US today are public. So why even bother? Let’s break down the potential benefits:
Liquidity and Monetizing the Management Company: Founders and early partners often have most of their wealth tied up in the firm. Going public allows them to unlock liquidity by selling shares in the management company—without waiting for fund distributions. As an example, Thrive Capital recently sold a 3% minority stake in its management company to investors like Henry Kravis (KKR) and Robert Iger (Disney) valuing the firm at $5.8B.
Acquisition Currency: A public stock gives firms a liquid asset to acquire other teams, firms, or investment strategies as well as capital that they could in theory use to expand into new areas. Blackstone and KKR have used public stock to buy businesses in credit, insurance, and infrastructure and expand their strategies. We’ve also seen the General Catalyst acquire La Famiglia, which could be a sign of more to come.
Brand & Credibility: Being public could enable venture firms to improve their brand and credibility which can help with LP fundraising, attracting top talent (more liquid source of compensation), and winning competitive deals.
While going public has the above benefits, there are some trade-offs:
Earnings Pressure: Public markets expect predictable revenue growth, which conflicts with venture’s long investment cycles. Specifically, it does encourage growing AUM since that corresponds to stable management fees, which may come at the detriment of aggregate returns.
Short-Term Scrutiny: Public companies face quarterly reporting pressure, making it harder to operate with a long-term mindset. In addition, their may be more scrutiny on how portfolio companies are valued and marked at, though many firms today already adjust marks on a quarterly basis.
Compensation Complexity: Carried interest distribution may need to be structured differently to align public shareholders with firm partners. In particular, while today, all the carry is split between the firm’s employees, now a portion of it will go to the public, and so employee compensation would need to be adjusted.
If you don’t yet receive Tanay's newsletter in your email inbox, please join the 11,000+ subscribers who do:
How Public Markets Might Value a Venture Firm
If venture firms do go public, how will public markets price them?
The closest comparisons are the publicly traded private equity firms like Blackstone, KKR, and Apollo, which have successfully listed on the stock market. Here’s are some lessons from their experience:
1. Four Key Metrics That Matter to Public Markets
Public markets will assess and value venture firms based on a few core metrics:
AUM (Assets Under Management): Investors prioritize firms with large and consistently growing AUM, as it serves as a proxy for revenue growth. The ability to scale AUM signals strength and sustainability.
Fee-Related Earnings (FRE): This represents earnings from recurring management fees, making it the most predictable revenue stream. It is calculated by netting out any operating costs (salaries, office expenses, etc) from the fee related revenue. Investors highly value firms with strong FRE. In general, FRE tends to be in the 50-65% of fee related revenue range.
Performance-Related Earnings: These are earnings that come from carried interest on investment gains, making them more cyclical and dependent on market conditions. Since these are lumpy and can be uncertain in timing, analysts will try to forecast what they’ll be based on the quality of holdings.
Distributable-Earnings: This can fluctuate a lot based on liquid investment gains, but its a non GAAP metric that measures net realized earnings from a firm’s various business segments (after adjusting for non‑recurring items and other adjustments) and represents the cash available for distribution to shareholders. It can be viewed as the sum of FRE and performance related earnings, with adjustments.
To gauge these metrics, investors will scrutinize the firm's current AUM base and its growth trajectory, how frequently it raises new funds, and the strength and durability of LP relationships. Additionally, they will look at fee percentages historically charged and the firm’s track record of fund performance and capital deployment efficiency as key indicators of long-term viability and growth potential.
2. AUM Growth Drives Market Perception
Public investors look at AUM growth as a proxy for future revenue growth. This is why private equity firms like KKR have set aggressive AUM targets ($1 trillion within five years)—higher AUM means higher management fees, which in turn drives stock price appreciation.
If venture firms go public, they’ll have to tell prospective investors about how quickly their AUM is growing and how ambitious their plans are to continue to grow it.
3. Fee-Related Earnings (FRE) Matter More Than Carry
One of the clear lessons from private equity IPOs is that markets rewards the stable, recurring management fee revenue more highly than volatile, event-driven carry. A higher multiple is placed on it, and in some ways firm arguably trend on fee-related earnings, although embedded in that multiple is a sense of the expected performance related earnings based on past performance and portfolio evolution.
4. Liquidity Cycles Matter
Unlike PE firms, which often have faster investment cycles, venture firms rely on longer, less predictable liquidity events. This cyclicality means that public VC firms could experience significant earnings swings, which might make them harder to value consistently, which could result in greater emphasis on fee-related earnings.
Given the points above, it’s perhaps not surprising that many of the firms we may see go public at some point are already implementing these strategies. They’re diversifying their business into additional segments (including wealth management), growing AUM to expand their management fee base, and raising larger funds, even if it means trading off some performance upside for more predictable fees and returns.
Closing Thoughts
To end with some back of the envelope math – Blackstone and KKR, both of which are valued at over $100B, trade at ~0.2x their AUM base and ~35x their fee related earnings. VC firms should have a higher multiple on AUM given higher management fees net (BX and KKR have non PE businesses that make up a portion of AUM), but that could mean a venture firm managing ~$40B in AUM has a very conservative floor of say $8B. When using the FRE multiple, if one assumes a 1.75% average management fee on the $40B at a 65% FRE ratio (i.e, 35% of fees go towards expenses) that puts such a firm at a $16B valuation.