the VC asset class to drive investment returns. Cambridge Associates just released its “Endowments Quarterly—Third Quarter 2014” report, where the average U.S. endowment and foundation universe returned -1.3 percent (yes, negative 1.3 percent).
Those with top quartile performance had the greatest PE/VC allocation, which was 12.8 percent of all assets managed and generated 17.4 percent return for the 12 months through the third quarter of 2014. Notably, the bottom quartile performers had only 2.4 percent PE/VC exposure. It’s also worth noting that the U.S. PE/VC index one-year return performace was 24.4 percent for the 12 months through the third quarter of 2014.
We know that capital follows returns, but arguably something equally important is also occurring, and that is a dramatic rise of the secondary market. According to intermediary Setter Capital, total secondary volume in 2014 was $49.3 billion—an increase of 37 percent from 2013. As greater liquidity comes to this part of the capital markets, limited partners in VC funds increasingly have credible alternatives to sell a VC fund commitment—perhaps making it more of a “trading asset,” or at least, create the appearance that these commitments are no longer 10+ years in duration. The Setter report observes that there are increasingly very large buyers coming into the market, buying positions in a wide array of private investment vehicles such as real estate, PE, venture, hedge and infrastructure funds. In 2014 there were 1,270 transactions in the secondary market.
But neither of the above observations accounts for the entire “funding gap”—clearly the investment data are capturing non-VC investors. This is in part the “Uber phenomenon” where a venture-backed company raises billions of dollars and it all gets lumped into the venture category (last month, Uber raised ~$1.8 billion from the Qatar Investment Authority, Goldman Sachs, Baidu, assorted hedge funds, and NEA). Clearly non-VC investors are looking for greater returns and have come down market to find them—either investing directly into portfolio companies or into venture funds—which in turns drives up the investment activity and pace (and valuations for break-out companies).
And as always, there were some fascinating nuggets buried in the detailed fundraising data that clarifies what may be really going on underneath the headlines…
• Of the 75 funds raised in 4Q14, the Top Five took home $2.3 billion or 41 percent of all dollars raised…the Top Ten scoped up $3.3 billion, or 59 percent.
• While the average fund size was $74 million, the median was a paltry $14.7 million…think about that long and hard.
• So naturally I looked at the other end of the list—the ‘’Bottom 10” funds raised a total of $8.8 million, or 0.15 percent of all dollars raised—not a typo.
• One new fund was listed as having raised $40,000—really?
• Of the 75 funds raised, 50 of them were less than $100 million in size—but it gets better!
• 27 funds were less than $10 million in size.
• Over the course of 2014, there were 96 first-time funds raised (of the 254 total new funds)— those first-time funds totaled $3 billion—so 10 percent of all dollars raised was by nearly 40 percent of the funds (the largest first-time fund was Presidio Partners at $140 million— congrats).
Putting aside the big themes, the venture industry is consolidating around a limited number of brands (underscoring my theme of a VC industry that is maturing to be just a money management business). Yet that still allows for a large number of smaller new innovative firms to co-exist. Of course, their challenge is graduating to the big leagues.
