Ventures in Portfolio Construction
It’s troubling to see so many public pension and sovereign funds scaling back their venture programs. I can’t help but feel these funds – these long-term investors – are missing something quite profound...
It’s troubling to see so many public pension and sovereign funds scaling back their venture mandates and commitments. It’s not that I blame them; no doubt the negative returns over the past decade have given investors sufficient reason to do so. Notwithstanding, I can’t help but feel these funds – these long-term investors – are missing something quite profound and important by giving up on this asset class. Venture capital is a crucial driver of innovation and economic dynamism, which should (in theory at least) help pension funds meet their liabilities over the long term. I recognize that it hasn’t been easy, but does the recent difficulty mean closing the door on the asset class altogether?
In order to get some insight on this, I decided to forego an investigation of the funds that are pulling back from venture capital and, instead, take a look at those funds that are actually moving into venture capital. For example, as you perhaps know, OMERS recently launched OMERS Ventures. And, as you perhaps don’t know, AIMCo has a new venture group (‘AIMCo Innovations’) that has been active for over a year now. What do they see that others do not? Good question.
To get some answers, I asked my friend Dr. Jagdeep Singh Bachher -- Deputy CIO at AIMCo and Head of AIMCo Innovations – to explain to readers of this blog why and how AIMCo does venture investing. Here’s a rough approximation of what he told me:
I have to admit, that’s a very innovative way to look at venture capital; you look for those venture assets that can play an important role within your broader portfolio of assets. This is actually something I’ve come across a quite a few times in the family office setting; they look at venture assets as potentially offering the ‘family business’ some value-add down the road. It’s a holistic approach to the asset class that seeks to extend the benefits of a single investment to the entire portfolio. And, at the same time, the institutional investor with a broad portfolio of assets can help the venture stage companies break their shackles through ‘intra-portfolio cooperation’. Win-win. Fascinating.
Now, that’s all well and good, but this strategy comes with a serious health warning. Doing direct investments in venture stage companies within a public fund requires serious levels of buy-in and understanding by the Board. Why? Because some of the investments will, inevitably, go to zero. And that’s OK. It’s the nature of the asset class. But Boards really need to understand this and be prepared for it. The hope is that you have more winners than losers and, it seems, that the net impact on the broader portfolio is positive.
Anyway, all this is to say one thing: It’s time to start thinking about venture capital again.