The invisible investors that move venture capital

April 4, 2021 | 5:00 am

“Don’t work for money; make this work for you. ” – Robert Kiyosaki, American businessman and author

Usually the spotlight is on the managers of venture capital funds like A16Z, Sequoia, Lightspeed. However, have you ever wondered what would become of these managers without their investors (Limited Partners)?

There are Limited Partners (LP) such as the European Investment Fund with assets under management of USD $ 8.5bn that have invested capital in more than 134 funds in the last 10 years; the endowment of the University of Michigan ($ 9.7 billion) in 78 Venture Capital funds; California Public Employees Retirement System (CALPERS) ($ 311.5 million) at 75 and HP Pension Fund ($ 29 billion) at 46.

These investors are the ones who really move the venture capital world.

The LP is one that invests money in a venture capital fund with the expectation of generating financial returns. The LPs do not have control or are involved in the decisions of the fund, this responsibility rests with the fund manager (General Partner).

According to Prequin, the main ‘limited partners’ of a venture capital fund are:

The top 100 venture capital investors invested on average in 28 funds in the last 10 years. They usually invest in funds that cover the entire venture capital cycle such as: seed stage, early stage, growth stage, including venture debt funds.

In emerging markets the main LPs are usually pension funds. For example, in Mexico they are represented by the Afores, which manage USD $ 236bn and have invested in venture capital and private equity funds through instruments such as CKD and CERPI.

The main characteristics by type of investor are the following:

Public pension funds (27%)

They are pension funds for workers regulated by the government whose objective is to raise money from workers so that they accumulate a wealth that allows them to survive during their retirement. These funds have an investment policy and make up a diversified portfolio in different asset classes, one of them being Venture Capital.

The main pension funds in the world are: CALPERS with $ 311.5 billion in assets under management and 75 investments in venture capital funds, California State Teachers Retirment System with $ 192.2 billion and 30 funds, New York State Common Retirment Fund with $ 178.6 billion and 21 funds, New York State Teachers Retirment System with $ 109.5 billion and 15 funds, and Regents of the University of California $ 97.5 billion in 30 funds.

Pension funds in Mexico manage 236,000 million dollars and the main ones are: XXI Banorte (50,000 million dollars), Citibanamex (40,000 million dollars), Profuturo (37,000 million dollars).

Private Equity Funds of Funds (19%)

There are also private equity funds whose investment thesis is to invest in other fund managers. In this way they take exposure to different geographies and different types of assets. Among them Venture Capital. Some examples are: Partners Group with $ 57 billion and 20 investments in VC funds, GCM with $ 45 billion and 18, HarborVest Partners with $ 40 billion and 45 investments. The Fund of Funds carried out this task in Mexico.

Private pension funds (15%)

Most companies, especially large companies, have private pension funds for the benefit of their workers. Some examples are: Boeing Company Pension Fund with $ 56.3 billion and 30 investments in venture capital funds, AT&T with $ 42.2 and 25, Lockheed Martin with $ 33.9 and 16.

Foundations (13%)

Foundations are typically private entities whose objective is to promote development in a certain geography or sector. Some examples are: J.Paul Getty Trust with $ 6.7 billion and 22 investments, MacArthur with $ 6 billion and 34 investments, Rockefeller with $ 4.2 billion and 31.

Government agencies (9%)

Multilateral or government agencies are also involved in development within the VC ecosystem. Some are: International Finance Corporation (IFC) with $ 88.3 billion and 44 funds, Netherlands Development Finance Company (FMO) with $ 9.6 billion and 22, and Proparco with $ 5.4 billion and 15 investments.

Endowment plan (5%)

Endowments are funds donated to universities in order to support scholarships, teacher salaries, etc. They make investments in VCs such as the University of Texas with USD $ 39.4bn and 55 investments, the University of Michigan with $ 9.7bn and 78, and the University of Pennsylvania with $ 3.6bn and 20.

Insurance companies (4%)

Insurance companies also diversify their capital by investing in VC funds. Such is the case of MetLife with $ 543bn and 40 investments in VC funds, LibertyMutual with $ 128 billion and $ 31, and Minnesota Life with $ 37.2 billion and $ 16.

Sovereign funds (2%)

Sovereign wealth funds or Sovereign Wealth Funds in English are state investment funds that manage the wealth of a government. Among them are: Alaska Permament Fund Corporation with $ 53.3 billion and 37 investments, BPI France with $ 49.7 billion and 16 investments. In Mexico there is the Mexican oil fund for stabilization and development, which has $ 1 billion.

Others (6%)

Sometimes other types of investors such as successful entrepreneurs or businessmen, high net worth individuals (HNWI) and corporations often invest in VC fund managers. Its objective is to have exposure to venture capital seeking attractive financial returns through innovation and technological disruption.

There is an interdependent relationship between GPs and LPs. Mega venture capital funds have achieved such size because they have focused on Limited Partners with the most capital. Thus, first-time GPs must understand who these investors are and what their investment processes are in order to have a fund of an adequate size.

LPs are sophisticated investors with a clear and defined investment thesis, robust investment processes, and a long-term vision.

“The risk comes from not knowing what you are doing” – Warren Buffet