![]() ![]() This is where funds of funds, with decades of venture experience and connections all over the world, can grant access to top quartile VC funds. These funds are repeatedly oversubscribed and without an existing relationship with the managers, it is very difficult to get an allocation and build a high quality, balanced portfolio. Those who are not long-time institutional venture investors, are not usually able to access top VC funds. J-curve mitigation is not the only rationale to invest in funds of funds. Our net TVPI has always remained above 1x, and we currently see a significant acceleration in performance. We typically make commitments of £50m to £100m to venture and growth funds of funds and have invested nearly £400m so far, to four different managers. By targeting a commercial rate of return, our primary objective is to demonstrate the attractiveness of long-term, late-stage venture and growth capital for institutional investors. This £500m programme is designed to address the patient capital funding gap in the UK. This is also exactly what we are seeing in our portfolio, three years after the launch of British Business Investments’ Managed Funds programme. Their overall J-curve can even be shorter than the VC funds they have committed to! This is backed by Cambridge Associates’ data, which indicates that the median performance of US venture capital funds of funds has consistently outperformed the median three-year rolling benchmarks for direct US venture capital funds. ![]() These days, with those two strategies included, high quality funds of funds can show a negative return for just a few quarters – or none at all, for some of them. The final upside is also greater than what it used to be: while 1.8x was considered as decent for a fund of funds in the old world, they now frequently return 2.5-3x on invested capital. Also, funds of funds generally do not pay any fees on co-investments, reducing the average cost on their LPs’ committed capital.įurthermore, when investing towards the end of the fundraising period, investors will likely buy into an existing portfolio which is already in positive territory. ![]() Co-investments are made to later stage, high growth companies, and therefore tend to be more profitable and be exited relatively quickly. When acquired early in the life of the fund, this uplift has a significantly positive impact on the whole performance. Secondaries are LP positions typically bought at a discount to net asset value (NAV), meaning they provide an immediate fair value uplift. While they used to only make commitments to underlying fund managers, they now add secondaries and co-investments into the mix. Funds of funds have changed drastically over the past decade and most of them implement an investment strategy to mitigate – or quite often, simply remove – the J-curve. This understanding, however, is now largely out of date. Add more fees for the fund of fund manager, the J-curve becomes even deeper and longer: until recently, it was not uncommon for it to last for four or five years. This means a negative return for LPs in the first years. VC funds’ performance follows a J-curve early in their life, with fees dragging down performance while underlying assets are still held at cost. They also charge a second layer of carried interest. They traditionally have the reputation of being expensive, due to the double layer of management fees – fees they pay to their underlying Venture Capital fund managers (usually around 2% of commitments), and fees they charge to their own LPs (ranging from 0.5% to 1%). Venture Capital: Why ‘fees on fees’ can be good for investorsĨ July 2021: For some private equity investors looking to allocate capital to the Venture Capital (VC) asset class, funds of funds are a no go. ![]()
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