Asset Management

FEATURE: Europe's Wealth Managers Are Just Not That Into Venture Capital

Tom Burroughes, Group Editor, London, 30 August 2012

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An investment sector that has been the toast of Silicon Valley and is sometimes fawned over by politicians hoping to fix economic problems, venture capital is not feeling loved right now. Will wealth managers learn to like it again?

For an investment sector that has been the toast of Silicon Valley and is sometimes fawned over by politicians hoping to fix economic problems, venture capital is not feeling loved right now. Will wealth managers learn to like it again?

While the UK government, for example, has sought to boost tax-deductible investment portfolios for fledgling businesses (Enterprise Investment Schemes, for instance), in general, the climate for venture capital has been poor. For example, the market for initial public offerings has been slow – and the recent debacle of the Facebook IPO hasn’t helped. And yet at a time when traditional bank funding has been squeezed by tighter bank capital rules, there is a need to find alternative sources of financing for the Googles, eBays and Apples of the future.

Venture capital falls into that broad asset class known as private equity but as far as many European clients are concerned, venture capital is far less attractive than other private equity species, such as buyout funds or distressed debt vehicles. (There appears to be a more significant interest in venture capital among US clients, where the sector is better established.)

One obstacle is clients’ demand for liquidity: venture capital is not a liquid asset class, given that a fund can take up to 10 years to bear fruit. Jonathan Bell, chief investment officer at Stanhope Capital, the European private investment office, said his firm puts as much as 9 per cent of his more aggressive clients’ money into private equity, but venture capital does not get much of a look-in.

“Venture capital and private equity investments do not suit the majority of our clients given the liquidity constraints, risk profile and work involved in investing in them,” he told this publication. “We prefer to avoid venture capital investing entirely given the higher risks involved, this means that we will not be seed investors in the next Facebook or Apple. However, we aim to invest in good growth businesses at the development capital stage,” Bell said.

Bell said that as far as his clients are concerned, they prefer distressed credit funds with a two-year investment period and a total life of five years and in distressed property related funds with similar lives. Most of the funds clients invest in have a target internal rate of return, after fees, of around 15 per cent, and a multiple on invested capital at around two times. (IRR is the standard industry measure of returns, designed to capture the complex timing of deals.)

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