Focusing on venture capital - set for further growth


In this month’s edition of CIO Monthly, we highlight the trend toward an increased allocation to venture capital and growth equity investments, and discuss the ongoing evolution underway in these sectors, as well as their strong returns over the past decade. We also highlight the need to assess top managers, given the material dispersion of returns in these sectors.

  • Since 1996, the universe of US publicly-listed companies has been declining substantially as less private companies choose to list. This has resulted in today’s listed companies typically being more mature than those that were listed 20 years ago. From an investor’s perspective, it is more difficult to gain an edge in older and well-established businesses than it is in younger businesses with uncertain outlooks.
  • New firms are growing revenue at faster rates over shorter periods, which has resulted in greater growth expectations and, ultimately, a rise in valuations. However, these firms are staying private for longer, which means investors who are not able to access these opportunities via private markets are missing out on potentially substantial gains.
  • Within alternatives, venture capital and growth equity have consistently outperformed other private market strategies for the past 10 years, and have done so with similar risk profiles to buyout strategies, which typically focus on larger, more mature businesses. The dominant sector in venture capital remains technology, which has performed strongly due to accelerated tech adoption during the COVID-19 pandemic. It is likely that secular tailwinds will continue to drive growth in this sector.
  • While performance in venture capital and growth equity has been strong over the past decade, manager selection is key to achieve return expectations, given the significant deviations between top and bottom-performing managers. This means that it is critical to partner with allocators that can not only access the full universe, but that can also access top-performing managers and their underlying portfolio companies.