Delano reported in a the outcome of a performance review on private asset investments by Norges Bank Investment Management. NBIM found that leveraged buyout funds “outperformed public equities, on average, by 3% to 4%,” annually whereas venture capital and growth equity funds “have underperformed by 1% to 2%,” on average. The study looked at vintage years from 1985 to 2016 with performance data up to 2Q23.
“Private equity, over the past decades, has been outperforming the public markets from a return perspective, but obviously, the risk factor is also higher,” said , alternative leader at PWC in Luxembourg. Delano noted that the adjusted its performance calculations to account for risk and sector bias among other factors.
Investing in VCs is a bit of luck, a bit of knowledge, being able to assess the people that you are going to invest in
“NBIM is an example to look at, and many other investors do,” said Paulussen. Yet he noted that NBIM is “taking care of public money” whereas the many other investors have a different perspective, “to get a certain return… expectations and the needs are different.”
What does it take to have pension funds investing into VCs?
In a , Bjorn Tremmerie from the European Investment Fund reported his frustration by the lack of interest from pension funds in VC funds. Brieuc Malherbe, venture capital/capital market leader at PWC, believes that the ideal product for pension funds are the funds of funds as analysing VC funds requires a specific set of skills. The company and the fund selection are key given the very low success rate (1 or 2 out of 10 investments may pay off) but high return potential, he thinks.
Moreover, Malherbe noted a transition of focus which started with Google and Facebook to biotechnologies and now to AI and Web 3.0. Moreover, in some cases, the lead investor may also be on the board. It is sometimes about investing into an idea or a team because “there is no product, there is no turnover… they must create everything.” He continued: “investing in VCs is a bit of luck, a bit of knowledge, being able to assess the people that you are going to invest in.”
Malherbe also thinks that fear is keeping pension funds at bay given VCs’ high-risk perception. He suggested that some of his clients are investing in several vintages to enhance the diversification benefits. “Yes, it’s risky, but if you look at the global IRR, more than likely it’s not.”
Paulussen suggested that some pension funds, such as in the Netherlands, must be attentive to their “coverage ratio” given the tight scrutiny from the regulator, a factor that may limit significant exposure to the sector. Yet he suggested an allocation of 5% to VCs as he repeated that “risks are higher, but returns are also higher.” Not being cognisant of the employee incentive programme at pension funds, he acknowledged that the impact for asset allocation managers confronted with significant coverage ratio breaches may be higher than when the VC positions “generate fantastic returns.”
Should you build your own private asset infrastructure?
It may be very challenging for VC investments given the required knowledge. Paulussen noted that some Dutch pension funds have started to set up private debt funds, a business that is not far from their current business of managing fixed income portfolios. He noted that some large pension funds are dipping their toes into direct investments in companies, but he stressed that it requires specific expertise whether it is “toll roads, airfields or windmills.”
“The regulatory environment, reporting requirements, tax environment, everything got much more complicated. So, you need a certain size to make it work. I’m a bit mixed,” warned Paulussen.
Direct investment in private assets by family offices
Given their higher flexibility, it will come as no surprise that Malherbe observed that some FOs in Luxembourg directly invest in companies, such as in the telecom or the beauty sectors, while some others are targeting VCs, such as in biotech and student housing sectors. He has also seen increasing commitments into co-investment, a phenomenon that recently with the chairman of the board at the Luxembourg Association of Family Offices. Paulussen noted that FOs are not in all asset classes but are “typically in real estate and PEs,” depending on the in-house expertise.
This article was published for the Delano Finance newsletter, the weekly source for financial news in Luxembourg. .