Venture Capital Is Worst-Performing Asset for Calpers
bloomberg.com
bloomberg.com
http://www.kauffman.org/~/media/kauffman_org/research%20repo...
(The whole thing is good read)
>The Kauffman Foundation investment team analyzed our twenty-year history of venture investing experience in nearly 100 VC funds with some of the most notable and exclusive partnership “brands” and concluded that the Limited Partner (LP) investment model is broken. Limited Partners—foundations, endowments, and state pension fund—invest too much capital in underperforming venture capital funds on frequently mis-aligned terms. Our research suggests that investors like us succumb time and again to narrative fallacies, a well-studied behavioral finance bias. We found in our own portfolio that:
- Only twenty of 100 venture funds generated returns that beat a public-market equivalent by more than 3 percent annually, and half of those began investing prior to 1995.
- The majority of funds — sixty-two out of 100 — failed to exceed returns available from the public markets, after fees and carry were paid.
- There is not consistent evidence of a J-curve in venture investing since 1997; the typical Kauffman Foundation venture fund reported peak internal rates of return (IRRs) and investment multiples early in a fund’s life (while still in the typical sixty-month investment period), followed by serial fundraising in month twenty-seven.
- Only four of thirty venture capital funds with committed capital of more than $400 million delivered returns better than those available from a publicly traded small cap common stock index.
- Of eighty-eight venture funds in our sample, sixty-six failed to deliver expected venture rates of return in the first twenty-seven months (prior to serial fundraises). The cumulative effect of fees, carry, and the uneven nature of venture investing ultimately left us with sixty-nine funds ( 78 percent) that did not achieve returns sufficient to reward us for patient, expensive, long-term investing .
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> Calpers, which manages about $303 billion, has pared back investments in VC funds to represent 5 percent of its private-equity portfolio. Calpers has been working toward reducing its VC assets to 1 percent of its total because it’s been rejected by many top firms it wants to invest in. In 2012 when VC holdings were 7 percent of the portfolio, a Calpers executive said VC firms often prefer to keep out investors that are required by law to publicly disclose details about fund performance.
If you are scared about your fund performance being public, its likely the opposite of your conclusion. Funds with above market performance tout it publicly and loudly precisely because it brings in more money for them to manage.
Similarly, Calpers looked into them based on the fact they were "top firms" however without verifiable returns that can be discussed publicly...no one (even Calpers) can be certain these are in fact "top firms" in terms of actual return for the institutional investor.
YCombinator and many VCs make investments that are public knowledge in startups and these reports are circulated in the media. There is no competitive advantage to be found in keeping investments secret long after the fact, unless you might scare off potential customers who believe you are a "top firm" when from a RoI standpoint you are not.
Markets need to be transparent and competitive to function fairly for everyone.
People that oppose that always are looking to screw you.
But it does have, I think, a lot to tell us about the role of startups in the larger economy in the medium term. For instance, it adds important data to discussions about crowdfunding.
Read the Kauffman paper posted on this thread, too: familiar conclusions in much more detail.
Private equity, now that makes sense.
Besides, if I'm not mistaken, that trails equities and bonds over the period.