Key Takeaways
- • IMD researchers Maik Meusel, Karl Schmedders and Maude Lavanchy argue that venture capital assets merit consideration as an alternative investment amid 2022 market turbulence, when stocks and bonds shed more than $30 trillion in value after inflation.
- • A 2005 paper cited in the article found a mean venture capital return of 59% between 1987 and 2000, versus 15.9% for the S&P 500 and 6.8% for Treasury bills over the same period.
- • Venture assets carry higher volatility, lower predictability, reduced liquidity and higher fees, making them suitable mainly for investors with long-term horizons.
- • Regulators are loosening constraints: Norway's sovereign wealth fund sought a rule change in early 2023 to invest in unlisted equities, Iceland allowed pension funds up to 1% in venture funds (May 2020), and Swiss pension funds may invest up to 5% since January 2022.
- • Venture-backed firms are under 0.5% of new US firms yet account for almost half of successful entrepreneurial IPOs, according to research cited by the authors.
Summary
According to an IMD article published June 2, 2023, authored by Maik Meusel, Karl Schmedders and Maude Lavanchy, investors are increasingly looking beyond traditional stocks and bonds after 2022, a year in which those assets shed more than $30 trillion in value after accounting for inflation. Tighter monetary policy and geopolitical tensions drove the decline, prompting a search for diversification and return sources.
Venture capital, defined by the authors as a form of private equity financing for early-stage, high-potential, high-risk companies, is gaining attention. Norway's sovereign wealth fund asked for a rule change at the start of 2023 to allow unlisted equity investment. Iceland agreed in May 2020 to let pension funds hold up to 1% of assets in venture capital funds, and Swiss pension funds have been permitted to invest up to 5% of assets in venture capital since January 2022. The authors note that investing through venture capital funds provides exposure to a portfolio of startups and reduces single-company risk, though typically at higher fee levels.
The article cites a 2005 paper finding a mean venture return of 59% between 1987 and 2000, compared with 15.9% for the S&P 500 and 6.8% for Treasury bills over the same period. The authors caution that venture returns are more volatile and less predictable, and that the asset class is less liquid, limiting investors' ability to adjust strategies. As a result, they say venture assets may not suit all investors; those with long-term horizons able to hold through market cycles are better positioned to bear liquidity risk.
The authors also point to diversification benefits from alternatives. They cite the Virginia Retirement System, which reported that its public stock and fixed income holdings declined in 2022 while real assets and private equity returned 21.7% and 27.4% respectively. Around 20% of American public pension fund holdings were allocated to private equity and real estate.
Beyond returns, the article highlights broader economic rationale. Iceland cited support for its financial system, stability and economy. Venture-backed companies, though under 0.5% of new US firms annually, account for almost half of successful entrepreneurial IPOs. In Europe, the authors note that Switzerland, which ranks second in the IMD World Competitiveness Ranking, has seen invested capital in Swiss startups rise eightfold since 2013, and that the Swiss authorities announced a Swiss Innovation Fund for growth-stage startups. A 2022 OECD report identified a lack of knowledge and expertise as a common barrier for pension funds considering venture investments. The authors conclude that risks should be carefully assessed, and reference IMD's recently launched Venture Asset Management Initiative as an effort to demystify the asset class.
Venture capital, defined by the authors as a form of private equity financing for early-stage, high-potential, high-risk companies, is gaining attention. Norway's sovereign wealth fund asked for a rule change at the start of 2023 to allow unlisted equity investment. Iceland agreed in May 2020 to let pension funds hold up to 1% of assets in venture capital funds, and Swiss pension funds have been permitted to invest up to 5% of assets in venture capital since January 2022. The authors note that investing through venture capital funds provides exposure to a portfolio of startups and reduces single-company risk, though typically at higher fee levels.
The article cites a 2005 paper finding a mean venture return of 59% between 1987 and 2000, compared with 15.9% for the S&P 500 and 6.8% for Treasury bills over the same period. The authors caution that venture returns are more volatile and less predictable, and that the asset class is less liquid, limiting investors' ability to adjust strategies. As a result, they say venture assets may not suit all investors; those with long-term horizons able to hold through market cycles are better positioned to bear liquidity risk.
The authors also point to diversification benefits from alternatives. They cite the Virginia Retirement System, which reported that its public stock and fixed income holdings declined in 2022 while real assets and private equity returned 21.7% and 27.4% respectively. Around 20% of American public pension fund holdings were allocated to private equity and real estate.
Beyond returns, the article highlights broader economic rationale. Iceland cited support for its financial system, stability and economy. Venture-backed companies, though under 0.5% of new US firms annually, account for almost half of successful entrepreneurial IPOs. In Europe, the authors note that Switzerland, which ranks second in the IMD World Competitiveness Ranking, has seen invested capital in Swiss startups rise eightfold since 2013, and that the Swiss authorities announced a Swiss Innovation Fund for growth-stage startups. A 2022 OECD report identified a lack of knowledge and expertise as a common barrier for pension funds considering venture investments. The authors conclude that risks should be carefully assessed, and reference IMD's recently launched Venture Asset Management Initiative as an effort to demystify the asset class.
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