Current Client Spotlight | Written by: Michael Downing of Gravity Ranch
The Sprint to Venture Capital
Venture capital, as an investment asset class for family offices, has always played a rather minor supporting role with single digit allocations out of the alternative investments mix from all but the most sophisticated family office organizations - while its more flashy siblings of hedge-funds and private equity funds pulled far more allocation historically.
Today, that reality is starting to change...and fast.
For all investors, the search for long-term growth has become incredibly challenging in a zero-interest reality, where real-estate is now far from a “safe” investment, corporate debt returns are a feeble 2%-3% at best, and municipal bonds are riddled with structural risk. These turbulent market conditions, combined with unexpected global factors, are driving an explosion of new interest in venture capital.
While the market conditions were steadily driving family offices to get more involved in the venture capital asset class in recent years - the pandemic has thrown that trend into hyperdrive.
Venture capital quickly became the only way to tap into the structural changes and opportunities triggered by the pandemic. Whether it is new remote-workforce technology, biotech innovations, educational-technology or even streaming-media platforms keeping people entertained while sheltering-at-home, venture capital is the wellspring delivering every sort of market opportunity. Many family offices not only want to invest in high-growth businesses that represent the future, but they also want their dollars to make an impact - this is where venture capital shines.
UBS found that 53 percent of family offices will invest in venture capital in its 2020 family office report.
But while venture capital rapidly gains more attention from investors, there are some real challenges around how to invest in this asset-class. Like private equity and hedge funds before it, the long repeated conventional wisdom has been 'invest in the top ten funds that have been around 20+ years.' Sadly, unless you are a sovereign fund wielding a $50MM-100MM check and participated in their last four or five funds, that is a highly unlikely possibility.
Data from leading industry sources like Cambridge Associates demonstrate up to 70% of the best investments in venture capital (since 2015) were from smaller and newer funds, or called micro-funds, many of which were first-time funds.
”In short, the widely held belief that 90% of venture industry performance is generated by just the top 10 firms is a catchy but unsupported claim that may lead investors to miss attractive opportunities with managers that can provide exposure to substantial value creation.” - Cambridge Associates
The good news for family offices is that these micro-funds rely heavily, if not exclusively, on high net-worth individuals and family offices as their primary source of capital.
Additional information on Gravity Ranch can be found here.
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