Why Venture Capital should be an integral part of a Portfolio approach right now
As stock markets around the world keep getting battered on the backdrop of constant negative news, there is plenty of introspection on what should be investing strategies moving forward. Even traditional safe havens like Gold have not got experienced as much upside as the past and banks in many regions across the world are giving practically nothing for putting money in them.
Here's where Private Equity, especially Venture Capital Funds of the ‘Vintage’ of 2020 come in. Usually set up with a horizon of 7 to 9 years, and investing in the Technologies of tomorrow, these funds offer a great avenue for true Portfolio diversification.
A lot of people prefer public markets and other assets purely for liquidity considerations. While money in a VC fund, does get “locked-in” for the Fund horizon, many Funds do make midstream distributions back to their investors. Further, most of the gains, are accrued towards the end of the Fund, at which point we will very likely be in a better economic climate than today. Indeed, successful investments in winning technologies like CrispR (for cancer detection and cure), logistics, cleantech and many others will be the underlying factors behind the economic boon of the upcoming years. Investing in a VC fund, NOW, can enable an investor to reap the numerous benefits that will accrue as these next-gen technologies disrupt traditional players and unravel large trillion dollar markets in the future.
From a purely financial standpoint, VC funds also make from a great investing alternative. The preponderance of VC funds offer a ‘hurdle rate’ of return to the investors – think of it as earning compound interest at a decent rate of return. After the hurdle is met, there is the notion of management catchup, and then capital gains are split in the ratio of 80:20 between investors and the management team. Therefore, in ‘sideways scenarios’ investors can get money back with a smallish upside; and, o the upside, gives them opportunity to participate in windfall gains when startups in the Fund portfolio companies hit paydays.