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Irish Pensions Magazine Autumn 2016
22
Feature
Venture Capital will enhance Pension Fund Returns
In a period of low interest rates, high alpha returns from an investment in
venture capital can have a significant impact on pension fund returns.
by Regina Breheny
Venture Capital:
• Invests in ground breaking innovation always seeking the disruptive technology;
• Builds fast growing businesses, only financing the most promising start-ups;
• Generates relatively high returns. Irish Funds are currently producing top quartile returns of 20%+
IRR;
• The investment outlook is very positive driven by maturing technology sectors, experienced globally
focused entrepreneurial teams and low entry valuations;
• Exit valuations are driving top returns;
• Funds are fixed term, self-liquidating, regulated limited partnerships.
O
ver the last 15 years, the venture capital industry
has grown and matured substantially to become
an established part of many institutional investors’
portfolios, with pension funds among some of the
most active investors in this type of asset class. Invest
Europe’s (EVCA) data shows that almost a third of the
capital raised by European venture capital funds in
recent years came from pension funds. In the UK private
equity continues to outperform other asset classes over
the long term and in recent years venture returns are
also outperforming significantly. Existing investors
are looking to increase their exposure, with a third of
pension fund respondents to a Greenwich Associates
report expecting to up their allocations over the next
few years.
What is Venture Capital and how can a pension
fund access this asset class? Irish Funds are currently
producing top quartile returns of 20%+ IRR. The
investment outlook is very positive driven by maturing
technology sectors, experienced globally focused
entrepreneurial teams and low entry valuations. Exit
valuations are driving top returns.
Venture capital provides equity and hands-on support
to companies, often in a series of “rounds” or tranches
of funding as pre-agreed milestones are met. Venture
capital is ideal for SMEs at start-up, growth and
expansion stages of development that are unsuited for
debt at this stage of their development because their
underlying assets are typically based on intellectual
property.
In essence venture capitalists:
• invest in ground breaking innovation, fostering
the commercialisation of ideas into new products
and processes while always seeking the disruptive
technology;
• build fast growing businesses, only financing
the most promising start-ups that could have a
multiplier effect on wealth creation and on higher
living standards;
• generate relatively high returns by accessing the
superior growth rates of these smaller, unquoted,
immature, developing companies.
• A venture capital firm establishes a Fund that has
the following characteristics:
• The Fund is normally structured as a Limited
Partnership with a fixed 10-year life. Capital
is provided by long-term private and public
investment funds e.g. Pension Funds, Life Insurance