The Invisible Investors that Drive Venture Capital
“Risk comes from not knowing what you are doing” Warren Buffet
Usually the spotlight is on Ventures capital fund managers such as A16Z, Sequoia, Lightspeed. However, have you ever wondered what would become of these managers without their investors (Limited Partners)?
There are Limited Partners (LP’s) such as the European Investment Fund with assets under management of USD$8.5bn that have invested capital in over 134 funds in the last 10 years; the University of Michigan Endowment (USD$9.7bn) in 78 Venture Capital funds; California Public Employees Retirement System (CALPERS) (USD$311.5bn) in 75 and HP Pension Fund (USD$29bn) in 46.
The Limited Partner is the one who invests money in a Venture Capital fund with the expectation of generating financial returns. LPs have no control or involvement in the fund’s decisions; this responsibility falls on the fund manager (General Partner).
According to Prequin, the main Limited Partners of a Venture Capital fund are:
The top 100 Venture Capital investors invested in an average of 28 funds in the last 10 years. They usually invest in funds that cover the entire Venture Capital cycle such as: seed stage, early stage, growth stage, including Venture Debt funds.
In emerging markets the main LPs are usually pension funds. For example, in Mexico they are represented by the Afores, which manage USD$236bn and have invested in Venture Capital and Private Equity funds through instruments such as: CKD and CERPI.
The main characteristics by type of investor are as follows:
- Public pension funds (27%)
These are workers’ pension funds regulated by the government whose objective is to capture money from workers so that they can accumulate a patrimony that will allow them to subsist during their retirement. These funds have an investment policy and have a diversified portfolio in different asset classes, one of them being Venture Capital. The main pension funds in the world are: CALPERS with USD$311.5bn of assets under management and 75 investments in Venture Capital funds, California State Teachers Retirement System with USD$192.2bn and 30 funds, New York State Common Retirement Fund with USD$178.6bn and 21 funds, New York State Teachers Retirement System with USD$109.5bn and 15 funds and Regents of the University of California USD$97.5bn in 30 funds. Pension funds in Mexico manage USD$236bn and the main ones are: XXI Banorte (USD$50.89bn), Citibanamex (USD$40bn), Profuturo (USD$37bn). - Private Equity Funds of Funds (19%)
There are also private equity funds whose investment thesis is to invest in other fund managers. Thus they take exposure to different geographies and different types of assets. Among them Venture Capital. Some examples are: Partners Group with USD$57bn and 20 investments in VC funds, GCM with USD$45bn and 18, HarborVest Partners with USD$40bn and 45 investments. The Fund of Funds carried out such work in Mexico. - Private pension funds (15%)
Most companies, especially large companies, have private pension funds for the benefit of their workers. Some examples are: Boeing Company Pension Fund with USD$56.3bn and 30 investments in Venture Capital funds, AT&T with USD$42.2 and 25, Lockheed Martin with USD$33.9 and 16. - Foundations (13%)
Foundations are typically private entities whose objective is to promote development in a certain geography or sector. Some examples are: J.Paul Getty Trust with USD$6.7bn and 22 investments, MacArthur with USD$6bn and 34 investments, Rockefeller with USD$4.2bn and 31. - Government agencies (9%)
Multilateral or government agencies also have a stake in the development within the VC ecosystem. Some of them are: International Finance Corporation (IFC) with USD$88.3bn and 44 funds, Netherlands Development Finance Company (FMO) with USD$9.6bn and 22, and Proparco with USD$5.4bn and 15 investments. - Endowment plan (5%)
Endowments are funds donated to universities in order to support scholarships, professors’ salaries, etc. They make VC investments such as the University of Texas USD$39.4bn and 55 investments, the University of Michigan with USD$9.7bn and 78, and the University of Pennsylvania with USD$3.6bn and 20. - Insurance companies (4%)
Insurance companies also diversify their capital by investing in VC funds. Such is the case of MetLife with USD$543bn and 40 investments in VC funds, LibertyMutual with USD$128bn and 31, and Minnesota Life with USD$37.2bn and 16. - Sovereign wealth funds (2%)
Sovereign wealth funds or Sovereign Wealth Funds in English are state investment funds that manage the wealth of a government. They include: Alaska Permament Fund Corporation with USD$53.3bn and 37 investments, BPI France with USD$49.7 and 16 investments. In Mexico there is the Mexican oil fund for stabilization and development, which has USD$1bn. - Others (6%)
Sometimes other types of investors such as successful entrepreneurs or businessmen, high net worth individuals (HNWI) and corporations often invest in VC fund managers. Their objective is to have exposure to Venture capital seeking attractive financial returns through innovation and technological disruption.
There is an interdependent relationship between GP’s and LPs. Venture Capital mega funds have achieved such a size because they have focused on Limited Partners with the largest capital. As such, first-time GPs must understand who these investors are and what their investment processes are in order to have an appropriately sized fund.
LP’s are sophisticated investors with a clear and defined investment thesis, robust investment processes and a long-term vision.
Please refer to the original publication at EL CEO: https://elceo.com/opinion/los-inversionistas-invisibles-que-mueven-el-venture-capital/
Hector Shibata. Director of Investments & Portfolio at ACV a global Corporate Venture Capital (CVC) fund and Adjunct Professor for Entrepreneurial Finance.
Ricardo Latournerie. VC Investor at ACV.
ACV is an international Corporate Venture Capital (CVC) fund investing globally in Startups & VC funds.
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