"My original thought process was that RIAs would be knocking on my door,” Jeff Ransdell, the founding partner and managing director of Fuel Venture Capital, said about raising money for his initial fund.

The opposite of what Ransdell wanted and expected became reality. Few RIAs considered investing in Fuel on behalf of their clients and even fewer were serious potential investors.

Ransdell used to be a financial advisor and has an affinity for them. Before he started his Miami-based venture capital firm in 2017, he spent nearly 20 years at Bank of America’s Merrill Lynch. At the end of that stint, he was overseeing more than 2,000 financial advisors tending to over $130 billion in assets. He’s observed many industry trends firsthand, including wealth managers migrating from the so-called wirehouses to join or start RIAs. 

One of the reasons some were leaving, he said, was for greater flexibility to choose better investment opportunities for their clients, especially the wealthiest ones. 

The growing number of RIAs should, in theory, mean more potential partners for fund-raising VCs. Instead, finding RIAs willing and able to invest in a venture capital fund proved to be a “massive challenge,” Ransdell said. In the end, only a couple RIAs contributed to the $200 million Fuel raised and used to build a portfolio of more than 20 companies.

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Despite improving technology, the expansion of third-party alternative investment platforms, and other efforts to make investing in alternatives easier for advisors, most of them aren’t allocating money to venture capital, due partly to perceived risk.

Venture capital firms aren’t particularly interested in RIAs either because of their slow-footedness, making the asset class even less attainable. But will the impasse be forever? 

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Institutions are hardly the only venture capital investors. Ultra-wealthy individuals and families have always invested in venture capital and they plan to allocate more, citing strong historical returns.

In a survey of 118 family offices completed earlier this year, the average investment portfolio had 10% carved out for venture capital, and the average internal rate of return for that allocation over the prior 12 months was 14%, according to a report by Campden Wealth, a research and networking organization. On average, their venture portfolios are 54% direct investments and 46% funds (which families said had an IRR of 16%).

The majority of family offices (86%) said they were happy with that performance and 63% said they plan to maintain or increase their allocations. More than half of family offices surveyed believe the highest returns in the space over the next decade will come from funds by emerging managers, according to the report.

Dedicating 10% of a portfolio to venture capital is considerable, even when alternative investments can account for more than 40% of family offices’ investable assets. But some RIAs are investing similarly on behalf of their less-wealthy clients.

Nicholas Bernardo, the managing partner of Bernardo Wealth Planning, an RIA outside Philadelphia managing $418 million, has over 150 high-net-worth clients, some with as much as $10 million to invest. He asked himself “how do we get their portfolios to look and feel like a $25 million investment portfolio in a responsible way?” Some of the RIA’s clients are qualified investors, but the only way to give others exposure to venture capital was to create a fund, pool their allocations, and invest with that money.

Bernardo has used a third-party platform to buy other alternative investments and spoke highly of it but he could not construct a venture portfolio using it. Establishing the fund, let alone managing it, required time and money: a platform to manage and report the holdings, the legal fees to create it, a fund administrator, and a third-party auditor are all necessary, he said.

“We’re certainly not charging two and twenty” and the advisors are also invested in the fund, Bernardo said.

The RIA’s venture fund charges enough to cover expenses and that differentiation is paying for itself in the form of new clients looking for a differentiator when choosing an advisor. 

Bernardo isn’t the only one. Family offices, private banks, broker-dealers and RIAs together have $2 trillion in assets aggregated by Addepar, a reporting software for wealth managers. Out of RIAs that use Addepar, 95% have at least 5% of client assets in alternative investments and out of that group, approximately 85% of the RIAs have some level of investment in VC funds, the company told RIA Intel.

But RIAs using Addepar tend to have more clients with large portfolios and who are investing on a longer time horizon. Those RIAs do not represent the roughly 20,000 RIAs focused on private wealth management, according to Addepar CEO Eric Poirier.

“From our perspective, there has been limited demand among RIAs for VC funds due to the risk profile in comparison to, say, private equity. Within alternatives, VC is on the higher end of risk and less interesting to someone who is looking to implement a low-risk portfolio,” Poirier said.

On Addepar’s platform, the RIAs hold 33% of their portfolios in cash and fixed income while single family offices hold 15%. “This may suggest that RIA assets/clients are generally lower risk and more focused on wealth preservation over returns relative to family offices,” Poirier added.

Other RIAs just lack the courage to do something different, to invest in venture capital, according to Ransdell. “Look at the Yale endowment and the allocation they have. And we have financial advisors who are afraid to put in a dollar. It’s fascinating.”

Ransdell acknowledges that alternative investments aren’t for every client or advisor. But more need to be thinking hard about their portfolios if their value proposition is investment management, he argues. Some RIAs might have the stomach for venture capital, but need to figure out how to navigate barriers only a small number are capable of getting over or around.

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In August, Sheel Mohnot, co-founder of Better Tomorrow Ventures (BTV), was speaking from a point of “supreme confidence” after raising most of the $60 million for his first fund. He admits he might have lacked the same self-assuredness four months ago.

“At the early stages of a fund’s raise you’re much more likely to take capital wherever you can get it,” he said. At the start, raising anything can help a new firm convince other investors it is worthwhile. A little validation can be like nudging a snowball down a hill.

One large RIA missed that window of opportunity to invest in BTV, Mohnot said. By the time the wealth manager made a decision and reached back out about investing, the firm was effectively set on completing the raise with only certain investors.

“I think the biggest thing is that a lot of people don’t realize that in this asset class, the asset chooses you as much as you chose it. I am the asset, I am the fund, and I don’t just take money from anyone that wants to give to me, it’s not like the public markets,” Mohnot said.

Institutions — endowments, pensions, nonprofits and others — have permanent capital that will need to be allocated again and again. Assuming all goes well, when BTV is ready to raise another fund, those investors will have capital at the ready and can make a decision fast. “There is importance in making a quick decision that can’t be overstated because there are folks who we spoke to early on and it just took them a long time, or many said ‘no’ early and then came back to us, and now there just isn’t room.”

“The next time I raise a fund, I want it to be like a two-week process,” Mohnot said. For that reason, if no others, most RIAs are low down the list of VC firms’ desirable limited partners.

This is where much of venture capital’s exclusivity stems from. The best-performing or most popular venture capital firms (ones with recent performance slipping but still highly sought after) are oversubscribed and near impossible to get into, unless an investor was in one previously.

But, like at BTV, even opportunities with the emerging managers willing to work with RIAs come and go fast. 

Most RIAs lack both the existing relationships needed and the resources and personnel to source emerging venture capitalists, do proper due diligence, and choose the right basket of managers. Not to mention have a platform and process for performance reporting, capital calls, and other logistical burdens. Still, assuming an RIA checks all those boxes, they might not have enough qualified purchasers, or a pool of client money big enough, to raise the eyebrows of fund managers. Some capital is just not enough to justify the headache of adding another small limited partner.

“There are good funds that would be open to capital from [RIAs]. We would also be open to it. It would have to be large enough to make it worth our while,” Mohnot said. 

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Custodians' alternative investment platforms have grown dramatically in recent years. Fidelity Institutional’s $25 billion alts platform used by RIAs and family offices grew 11% year-over-year as of June. Third-party alternative investment platforms are also integrating further with RIA custodians and their assets are helping even more capital find those investments. Financial advisors, many through 67 white-labeled versions, have plowed over $53 billion in assets into more than 500 funds offered on iCapital Network’s alts platform.

A fraction of that money was allocated to venture capital — the platform has only offered a couple VC funds, according to Kunal Shah, a managing director and Head of Private Equity Solutions at iCapital. Those funds offered were successful at raising money through iCapital, but the platform built on making alternative investments more available faces the same lack of accessibility others do.

Brooks Gibbins, a managing partner at FinTech Collective, a New York-based venture capital firm, wonders if a 60/40 portfolio will deliver the returns modeled for investors’ goals and plans. He thinks portfolios of the future will look more like those of the ultra-high-net-worth and family offices and the digital platforms are what will enable that. “To me, the digital platforms, like Artivest and iCapital, are the difference maker,” Gibbins said.

The venture firm has also put its capital behind that prediction — FinTech Collective was an early investor in Artivest, an alternative investments platform that was acquired by iCapital earlier this year.

The overall interest in venture capital by RIAs is questionable, too. There might simply not be enough advisors with the right clients and experience constructing portfolios to invest in creating those relationships, at least not yet.

More advisors are asking iCapital specifically about allocations to VC funds, but those conversations are happening only about once per quarter, Shah said. Most RIAs “don’t have an organized way to think about alternatives yet, let alone venture capital...it will take many years for them to say, ‘oh I will need to make 5% of my allocation to venture capital.’”

Or the vast majority of RIAs might never say that. The seemingly untouchable asset class might remain that way indefinitely.

There are probably fewer than 50 RIAs in the entire country capable of investing in venture capital like institutions and family offices, a partner at one multibillion-dollar RIA estimated. His firm has been allocating more money to alternative investments than it has in decades, and successfully helping clients invest in venture capital funds, the partner said under the condition that he and his firm could remain anonymous.

He doesn’t think there is much demand from RIAs and can’t see what might change that.

“The venture space is a tricky space for so many reasons… You need to have a client base that can really say goodbye to liquidity.”

Michael Thrasher (@Mike_Thrasher) is a reporter at RIA Intel based in New York City.

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