Funds of Venture Capital Funds as Diversification Tool
Funds of venture capital funds offer some unique opportunities for investors to diversify much of the risk associated with private equity investments given the present market conditions. First, funds of venture capital funds offer investors-that are large enough to make venture capital allocations but lack the capital for proper diversification-exposure to a broad range of venture capital funds and underlying start-up investments, and let them offset risks associated with single-manager investments. Second, funds of venture capital funds provide access to closed funds that individual investors may not otherwise be able to include in their portfolio. In addition, these funds let investors have better exposure to geographic regions that may not be accessible through individual investments.
On a day-to-day basis, Brighton House Associates seeks out investors interested in this investment strategy. One institutional investment advisor specifically mentioned its interest in funds of venture capital funds as a means for diversifying its clients’ underlying portfolios. This consultant represents the U.S. interests of a large sovereign wealth fund, which shows the breadth of investors interested in these products. A family office located in Hong Kong told us of its active interest in funds of private equity funds. This particular investor mentioned its interest in funds of venture capital funds as a means to obtain exposure to U.S.-focused venture capital funds, as it did not have the infrastructure necessary to make the proper investments itself.
As the present market turmoil shapes investors’ portfolios, funds of venture capital funds remain one of the last opportunities to diversify risk and achieve positive returns. With a balance of diversification and proper risk control, these funds allow for better exposure to venture capital funds by geography and sector.