Essential Allocator: Cautionary Tale

Cautionary Tale: Back in 2012, after the Global Financial Crisis, the Ewing Marion Kaufman Foundation published a definitive 52-page mea culpa on venture investing. The foundation’s investment team analyzed its 20-year history in venture capital across almost 100 funds and found that just 20 beat a public market equivalent by more than three percent annually. Half of those funds were invested before 1995, over 15 years before publication and during one of the best eras for venture and tech. “It basically said get out of venture unless you’re in the tier ones,” said Roger Vincent, founder of Summation Capital, who called my attention to the report. Fellow foundations “really listened to them. It basically said it’s all about access. ”Indeed, the report’s first recommendation –– abolish VC allocation requirements –– argues that “in the absence of access to top VC funds, institutional investors may need to accept that investing in small cap public equities is better for long-term investment returns than investing in second- or third-tier VC funds. ”But Vincent cautions that research published since this report shows that diversifying by adding smaller, nimble, emerging funds to a roster of top-tier managers can lead to outperformance. This is at the heart of his investment thesis at Summation (which you can read more about on Institutional Investor’s website next week) –– and what drove high returns at Cornell University’s endowment where he was head of private equity until leaving February. It seems unlikely that nonprofits will follow the 20-year-old advice and abandon venture capital in the wake of the latest market dislocation. But as your institution pivots to private credit (or whatever the next flavor of the month investment may be), it’s worth keeping the lessons learned from the report — and its fallout — in mind.