Analysts said this may be more of a one-off than a sign that limited partners’ interest in venture capital is waning.
Los Angeles The County Employees Retirement Association (LACERA) voted to reduce its allocation to venture capital at its March 13 meeting.
The investment committee voted to lower the allocation range for venture capital and growth equity from 15% to 30% of the pension system’s private equity portfolio to 5% to 25%. LACERA’s venture capital portfolio currently accounts for 10.8% of the PE investment portfolio.
It’s a somewhat puzzling move as the subset has been hugely successful, with TVPI (a figure representing realized and unrealized profits on the fund’s investments) at the end of 2023 of 2.08x, the highest among the private equity portfolio subset. The highest strategy.
As of the end of 2023, the organization reported that the five best-performing funds ever in its private equity portfolio were all venture funds, including four from Union Square Ventures, spanning 2012 to 2016. The company has also backed the following venture capital firms: Innovation Endeavors, Storm Ventures and Primary Venture Partners.
Investment officer Didier Acevedo said market conditions were the main reason behind the change. He added that superannuation funds want their investments to be more flexible and dynamic. Given that superannuation funds are currently under-allocated within their existing range, this move may free up funds for other strategies rather than reducing the size of their actual risk portfolios.
Analysts told TechCrunch the situation may be more of a one-off than an early sign of an upcoming trend.
StepStone partner Brian Borton told TechCrunch that while you can’t paint a general picture of the entire LP community — LPs such as high-net-worth individuals and family offices are more fluid in investing, while LPs such as pension funds are less reactive — he doesn’t do so. . I haven’t heard of anyone wanting to reduce their allocation to venture capital. In fact, he said, StepStone is seeing increasing demand from limited partners for its venture capital services.
“The pension funds we’re talking to are viewing this period of soft funding for risk asset classes as an opportunity to improve their funding pipelines,” Bolton said. “U.S. public pensions are generally lagging in venture capital.”
In addition, PitchBook venture capital analyst Gao Kaidi said that many limited partners learned their lessons after the financial crisis and now know not to sit on the sidelines for an entire year. But they may invest fewer dollars. If typically supportive managing limited partners raise smaller funds — and venture capital firms including Insight Partners and Greycroft have cut near-term fund targets — limited partners may write smaller checks, Gao said. , so you may not need to allocate as much capital to this strategy.
In addition, the limited partners will continue to focus on the existing managers. While this trend began in 2022, when public markets initially began to sour, many venture capital firms are delaying funding rounds as long as possible. As more venture capital general partners are forced into the market this year, the true scope of the LP pullback will be felt.
“In periods of high volatility, or when there’s a lot of uncertainty in the market, we see people choosing premium flights and just going back to what they’re most familiar with,” Gao said. “For some limited partners, especially institutions For participants, [that means] It just defaults to big brands and funds that have been around for a long time. “
It also means many limited partners may not add any new manager relationships to their portfolios this year. Borton added that if limited partners do withdraw, they may consider curtailment measures rather than distributions.
“These agencies have target allocations and are long-term in nature,” Bolton said. “They’re not going to cut back on venture capital allocations. They need to react to the current market to some extent by slowing down the pace of investment or reducing the number of relationships.”
Neither Bolton nor Gao expect significant changes in limited partner allocations to venture capital this year, but there are always exceptions.
