Ventures in Portfolio Construction

It’s troubling to see so many public pension and sovereign fundsscaling backtheir 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 arepulling backfrom 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 launchedOMERS 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:

Direct Investor:“阿尔伯塔投资管理公司利用其exp看到一个真正的机会erience doing direct private equity and direct infrastructure to do direct venture. We think we have a competitive advantage over private sector players...time-horizon, scale, diverse set of portfolio companies... that will help us generate solid returns.’ Sourcing Deals:‘As a long-term investor with an ability to write big checks, the venture community really comes knocking on our door. This minimizes the deal sourcing requirements, but it puts a premium on being able to spot the deals that fit into our portfolio.’

Criteria:‘We look for venture deals where we can develop good relationships with management. Our objective here is really to build industries (not just companies). Also, when we think about whether to invest in an asset, we consider our broad portfolio and assess whether the venture-stage company could be matched up with some of our other portfolio companies or assets in a synergistic way. We only want to invest in venture assets where we can add value, be it through our knowledge, our capital, or our portfolio of assets.’

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.