Venture capital has been increasingly out of favor for pensions and sovereign funds. And I find that particularly frustrating. I accept that financial returns have been poor for some time, but venture investing is a crucial driver of innovation and economic dynamism. So, ironically, the same pension funds that are today pulling away from venture capital investing will, at some point down the road, rely on the current crop of venture financed companies to meet their obligations. And so I continue to look for new ways to revitalize this industry and get LPs excited about the asset class.
As I see it, much of the problem for LPs stems from the structures and access points available to them for investing in the asset class. For example, the Kauffman report highlighted the misaligned incentives and agency problems embedded in the external management model. And , additionally, building a ‘direct’ VC program within a pension fund is almost impossible; the primacy of local knowledge and networks in venture capital makes this beyond the reach of 99% of institutional investors. So there’s really no easy or aligned way to invest. As such, back in May, I argued that LPs should start thinking about seeding new vehicles that can offer more aligned access to venture capital outside of the traditional partnership model.
Enter the Wellcome Trust.
As I’ve said before, the WT is one of the most creative institutional investors in the world. With a compound annual growth rate of 14% (!) since 1986, it’s long-term performance is better than Harvard’s and the same as Yale’s. In fact, only Warrant Buffett is better (with a 17% IRR). In addition, the endowment has 8% of its assets in venture capital and ... unlike many of its peers... it has managed to get 9% from the asset class on an annualized basis over the past five years.
Put another way, if there’s one institutional investor that I’d watch in the domain of venture capital, this is it. And, interestingly, the UK-based endowment has just done something quite creative: It has just seeded a $325 million venture capital business that will back biotechnology startups. The new outfit is called Syncona Partners, and it’s being structured as an “evergreen investment company”. There’s a lot to like here:
“Syncona will take a long-term view towards the creation of sustainable healthcare businesses. Its structure allows it to support partner companies as they grow and succeed. Ultimately, its aim is to hold investments in a small number of significant, profitable businesses that have transformed their healthcare markets.”
I love it.
If you don’t know what an evergreen fund is, I think it is perhaps best to start by saying what an evergreen fund is not: it is not a traditional GP fund with a finite time horizon. Rather, an evergreen is set up so that the VC can hold a portfolio company forever and not have to pay bankers or brokers to help facilitate an exit (so they, the managers, can touch their carry). Still confused? Read this.
Anyway, I like this new Wellcome vehicle because it fully aligns the VC manager’s interests with those of the asset owner. That’s really the beauty of this. It offers many of the benefits of an in-house VC practice, while still offering the flexibility to attract top talent and operate globally.
In addition, I think this specific vehicle is particularly interesting because it leverages the unique skill set of the Wellcome Trust, which is a charity entirely focused on health care. As such, building a venture practice around healthcare is probably quite smart from the perspective of asymmetric information and deal flow.
Finally, there’s a part of this that also feels like ‘impact investing’, which is another topic I’m quite interested in. For example, here is how Sir Mark Walport, Director of the Wellcome Trust, described the motivation for this new investment vehicle:
“The Wellcome Trust is known as an investor that takes a long-term view. [Syncona] will extend this successful approach to direct investments in emerging healthcare technologies, to give small and medium-sized companies the support they require to fulfil their potential... This important investment opportunity will help the Trust to fulfil its vision of achieving extraordinary improvements in health, by generating returns that can be used to fund the work of outstanding researchers in the biomedical sciences and the medical humanities.”
Put another way, this vehicle will not only generate solid returns but it will also help the WT achieve its long-term health care objectives. Anyway, I’ll be very interested to see how this vehicle develops over the coming few years...
