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Irish Pensions Magazine Autumn 2016
24
Feature
companies, Endowment Funds, Foundations,
Sovereign Wealth Funds and State bodies. Venture
capital fund managers also co-invest with other
investors;
• The capital is only drawn down as the Fund makes
its investments, venture capital funds don’t hold
cash;
• The investment period for the Fund is generally
five years, and after that the focus is on managing
and making follow-on investments in an existing
portfolio. After an initial investment is made in a
portfolio company additional capital is reserved
to fund further development but is only drawn
down from investors as it is required;
• investors and eventually the Fund is closed. In
effect the Fund is self-liquidating;
• After the five-year investment period the venture
capital firm raises capital for a new Fund;
• The venture capital firm itself is regulated by the
Central Bank of Ireland under the AIFM (Alternative
Investment Fund Manager) Directive and can elect
to register its fund under the EuVECA regime.
This is a voluntary regime that provides venture
capital funds with the benefits of a single EU-
wide marketing passport yet with lighter-touch
regulatory requirements than those mandated by
the AIFMD.
Venture capital teams usually have a technology
background (scientists, engineers, researchers) or a
business background with deep industry experience.
A core skill is the ability to identify novel technologies
that have the potential to generate high commercial
returns at an early stage. Normally the interests of the
venture capital fund and entrepreneurs are aligned and
both have a common interest in building a business and
exiting it through an IPO or a trade sale over time.
Irish firms have specialist domain knowledge and
invest primarily in fast growing high tech companies
operating in the ICT and the Life Sciences sectors.
These companies are developing deep technologies,
addressing global markets and creating thousands of
high calibre jobs. Irish venture capitalists add significant
value to portfolio companies by syndicating with tier
1 international Funds and corporate investors, by
introducing international business partners, customers
and acquirers, by recruiting senior management, by
introducing corporate governance and by endorsing
the business and management team to the sector in
which it operates.
Why should a pension fund invest in this
asset class?
An investment in a venture capital fund provides:
• Performance
– The most powerful rationale for
pension funds to invest in venture capital is its
ability to provide good returns on an absolute
and relative basis. In the UK, BVCA figures show
that pooled venture fund IRRs exceeded the
FTSE All-Share returns over 1, 3 and 5 years at
an accelerating rate. 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.
• Diversification
- In an uncertain world, venture
capital is an increasingly attractive volatility
flattener because it is imperfectly correlated with
public markets and so it can have a smoothing
effect on the volatility of the pension scheme
that is inherent in investing in public equities and
other risk assets. It offers attractive risk returns,
with control, plus long-term out-performance and
a non-cyclical approach.
• Access to High Growth
– Venture capital funds
offer investors access to private companies that
are operating in specialised sectors in high growth
markets that are otherwise hard to gain exposure
to via other asset classes. The companies are
often smaller, fast-growing businesses that are
operating under the radar of other types of fund
manager.
• Long-term Horizons – Pension funds need assets
that generate long-term returns above inflation so
that they can meet their liabilities. The long-term
nature of venture capital investment provides a
good match for the long-term liability profile of
a pension fund. With returns generated over a
ten-year stretch (sometimes longer) exposure to
venture capital can help pension funds with liability
matching alongside more liquid investments,
while also providing a premium for illiquidity.
Irish VC managers, with over €1bn of AUM, invest
primarily in companies located in Ireland, the UK,
Europe and the US. They are managing larger funds
with proven teams that have domain expertise with
access to global networks.
What are the risks and how are they man-
aged?
Assessing risk is a normal function of portfolio
management and pension fund managers are well
Irish Funds
Specialist domain knowledge
€1bn of AUM
Manage International portfolios
Syndicate with Tier 1 International Funds