Large institutional investors are interested in expanding their participation in venture capital, but are a little gun-shy after the recent credit crisis. And a bit more flexibility in the traditional VC investment model would help.
That’s the word from JobSearchDigest subscriber Peter Leonardi, Ph.D., MBA, and a Director at Five Prime Advisors LLC in New York. Leonardi spoke recently with a Chief Investment Officer at one of the largest university endowments in the country. The CIO’s comments were eye-opening.
“He told me that until recently, they hadn’t fully appreciated the importance of liquidity. With the current VC model, you commit capital for up to 10 years. And the amount you commit can be called in at will by the venture capital firm. So that’s an inverse liquidity situation. You don’t have the control over your own money. In fact, someone else does.”
“With the recent credit crunch, they were getting capital calls at the worse possible times. They (the university endowment) were forced to liquidate some positions that were performing well, just to meet these capital calls. The ability of VC funds to call in this money whenever they wanted, was even worse than having their money tied up in an investment for years. And very expensive for the endowment.”
Leonardi says many large institutional investors are looking for a new model that would take their concerns about liquidity into consideration. However, this new model doesn’t yet exist.
On the positive side, although these mammoth institutions have the clout to pressure VC firms to trim their traditional 2 and 20 compensation scheme, they are not in a rush to punish the industry.
“At the end of the day, they want fund managers to be happy, too. They would simply like to see the interests of the VC firm aligned more closely with theirs. They’re not looking to screw anyone. They know, at the end of the day, that these people have to be compensated well because if they’re not, they’ll do something else,” Leonardi says.
What are your thoughts? How can the venture capital industry be better aligned with investors’ needs? Add your comments below.
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Interesting. The analysis here is worth considering before taking a decision of which school to join – Top schools or the best value schools that will give a maximum ROI?. Looking at both the top schools and best value schools, I think University of Pennsylvania: Wharton is the first to secure its place in both of the lists.
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