Future Fund searches for VC managers

Australia’s sovereign wealth fund is looking to partner with top managers to find value in the rapidly-changing venture capital market but warned that the intense competition for assets makes closing deals difficult.

During the Australia Investment Council conference held in Melbourne on Wednesday, Wendy Norris, deputy chief investment officer, private markets for the A$160 billion Future Fund, said venture capital remains key to accessing the innovation cycle and disruptive technology. She further told delegates that venture – and growth capital – play an important role in the fund’s private equity program, with around A$15 billion invested currently.

In addition to accessing the innovation cycle, venture capital delivers an uncorrelated risk exposure.

To earn an acceptable return, the fund will keep a “laser-like” focus on partnering with top-quartile managers who are responding proactively to the changing macro-environment, Norris added.

“It puts the onus on us to make active hold or sell decisions about the individual stocks we end up owning when managers exit  their more mature investments in to the public markets.

“It also requires us to actively adjust our investment pacing decisions to reflect the longer expected hold periods across private equity and venture.”

Norris warned that the fund would continue to search for the right partners.

“Capital availability is like a pendulum and whilst it is very favourable towards managers right now, we know this will swing back at some stage and those who treat us well when capital is abundant will find us to be a great partner through leaner times.”

The deputy investment chief noted that market changes are affecting both the private equity and venture capital industries.

“In the private equity market, we see fund managers that are awash with capital striving to deliver the same returns they have delivered in the past.  This is despite strong market competition for deals and less use of leverage,” she said.

For their part, she continued, venture companies are staying private for longer. As companies no longer look to public markets to fund their expansion stages, private funds are supplanting the role of IPOs.

Norris also noted that from the investor’s perspective, the return dispersion between best and worst performing venture funds is large, and average market performance has been “average”.

However, she conceded that there were fewer attractive investment opportunities which forces them to look for places where they can earn greater returns.  “The illiquidity, complexity and skill premia that are available in private markets start to look very attractive.”

During her speech to the AIC, Norris said privately-held investments have grown twice as fast as public markets in the last decade. They now account for more than US$6 trillion of market value – almost 10 per cent of global investment assets.

Further, she underlined two key challenges when investing in private markets – navigating all the complexity and paying away a larger portion of the excess return through fees.  Also, she went on to say, as an investor, you end up with a less flexible portfolio. “There is a very real risk that you may not be able to meet the liquidity demands of your beneficiaries when they make them.”

“This means that all investors, including the Future Fund, need to be thoughtful about how they navigate the balance of risks and rewards in private markets and how they can gain access to the best opportunities, while all the time continuing to adapt and improve their investment processes to keep up.”