Industry must get creative on engaging VC


By Wouter Klijn

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The superannuation industry needs to come together to find a structure that allows funds to invest in venture capital, according to venture capital firm Oneventures.

Ignoring the asset class not only means funds miss out on returns, but it also means there is a lack of available capital to bring start-up companies to maturity, which ultimately is bad news for the domestic economy, Oneventures chief executive Michelle Deaker tells theinstoreport.

“I think super funds need to get creative in how they work with us. It is certainly not a sector that should be ignored,” Deaker says.

“The Future Fund told us the other day that it was their best-performing asset class.

“They have a 35 per cent IRR (internal rate of return) on venture capital, so if you can get in and pick the right fund managers, you really can drive this outperformance in returns.”

After the global financial crisis, institutional allocations to venture capital nearly dried up due to an increased emphasis on liquidity, a focus on low fees and a move away from the fund-of-fund model, which has historically been the model used to access venture capital managers.

But in the current environment of low interest rates and richly-valued equity markets, venture capital should be on the menu for most institutional investors, Deaker says.

“It is for the industry to work out a mechanism through which they can invest,” she says.

“It might be that the super funds will pull together and have some sort of vehicle that allows them to invest.”

Later-stage VC under-represented

In the United States, the capital allocated to late-stage venture capital is almost double that of the amount allocated to start-up and other early-stage venture capital investments, but in Australia it is the other way around.

This causes problems for companies that have outgrown their start-up phase.

“As companies mature and move from being a start-up, there is no financing available for them,” Deaker says.

“When they get to the next stage, where they should really be accelerating their growth, putting on staff and extending their sales teams, they get no capital.

“Often in Australia, they go to a bank and take out a half-a-million-dollar loan, where they need an injection of $5 million to $10 million in capital.”

But this imbalance also provides opportunities for late-stage venture capital investments and the firm is looking to establish a fund dedicated to this space.

“We are raising a $100 million fund,” Deaker says.

“We have seen one super fund starting to engage and we are looking at ways of bringing them in.

“They would like to have a way of deploying a whole $100 million, but they don’t want to be the sole investor.

“They would like to have maybe 20 to 30 per cent of a fund, not 100 per cent of a fund. So we are looking at ways to structure things to make it more attractive for them.

“We are looking at ways that we can get a big fund manager that is managing billions of dollars to be able to work with us as a relatively small fund manager in a meaningful way.

“It is about packaging that up to be attractive to them, but it is still challenging to make it work.”

Policy change

Australian Private Equity & Venture Capital Association chief executive Yasser El-Ansary supports Deaker’s call for a wider discussion on how to deploy superannuation money into venture capital.

“There is an urgent need for an overhaul of how we put money into venture capital and that is critically important for the long-term health of our economy,” El-Ansary tells theinstoreport.

“We are in discussion with the government on the need to put in place the right policy frameworks that support the private sector to invest in venture capital and invest in innovation, especially the technology and biotech industries.

“Because everyone recognises the link between investing and innovation, so that does mean we need to take some significant steps to ensure private sector funds flow into venture capital.”

He says there are some initiatives that seek to make investment in venture capital more attractive, including co-investment structures where investors get to invest directly into a company alongside the venture capital managers.

“There is some evidence of that strategy being deployed right now, but it is unclear whether this is the way forward,” he says.

He says real change will have to come from government policies that stimulate the private sector to provide funds for innovation.

“We are expecting that when the government releases its National Industry and Innovation Competitiveness Agenda, which is due to be released later in October, that the government will lay out a blueprint for its long-term innovation policy and take steps towards the private sector playing a more prominent role,” he says.

Diminishing demand

Yet, asset consultant Frontier Advisors says that although it acknowledges some of the problems with access to venture capital, the demand for the asset class is limited.

“We have certainly seen some of these points raised, but we’ve also found that the track record of venture capital in Australia has been pretty ordinary and this has been a major deterrent for our clients,” Frontier Advisors consultant Joey Alcock tells theinstoreport.

“The historical performance of Australian fund of funds that had exposure to both the buy-out and venture capital space showed that venture capital has had the most significant drag on performance, especially in the 2000s,” Alcock says.

Although a number of clients are still interested in venture capital, their attention is focused on only a few regions, he says.

“The focus has pretty much narrowed down to the West Coast of the United States, especially on technology in California,” he says.

He says a number of clients are choosing to invest directly with venture capital managers, while others look for cost-effective allocations through co-investments.

The idea of a collective vehicle, where a number of investors come together to establish a dedicated venture capital capability has some merit, he says, but it runs the risk of not achieving the best outcomes.

“It is possible, but if you are getting median returns, then you are not getting the full benefit of the illiquidity and active management,” he says.

“[When investing in managers] you really want those top-quartile managers and in venture capital that is even more pronounced.

“[But] access to the best venture capital managers at the moment is all tied up.

“You’ve seen the ones that continue that have strong track records, like Sequoia [Capital], have stopped taking in fund-of-fund money and focused just on a limited number of institutional investors.

“To get into a fund like that is very difficult.”

The same is true for a large number of other top-quartile managers.

“You don’t want venture capital exposure for the sake of getting venture capital exposure,” Alcock says.

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