For investors in technology start-ups, it’s all about disruption. Discover a new business on its way to bursting apart an industry and putting it back together — Spotify for music, Facebook for mobile advertising — and all that high-risk speculation is well worth it.
Tech investors are balancing the risk inherent in hunting for the next great disruptor by allocating to something very different: real assets that hold their value amid technological change. This strategy may turn out to be a smart move in a frothy market.
Between 2009 and 2013 total U.S. venture capital funding for start-ups ranged from $20 billion to $30 billion annually, the Arlington, Virginia–based National Venture Capital Association reports. But almost $24 billion was raised in the first half of 2014, according to CB Insights, a New York–based venture capital research firm. During that period the number of U.S. tech companies whose first financing round gave them a valuation of more than $1 billion climbed 133 percent year-over-year, CB Insights notes. These spikes have prompted venture capitalist Bill Gurley, a general partner with Silicon Valley VC firm Benchmark, to voice concerns about a bubble in the start-up space.
For angel investor Scott Banister, keeping his portfolio diversified means a dedicated allocation to real estate, especially farmland. Banister, who works out of the Bay Area, was an early investor in e-commerce giant PayPal. His current investments include ride-sharing service Uber and mobile-based delivery business Postmates, both of which are headquartered in San Francisco.
“If I’m investing in technological change, I would like to have part of my portfolio invested in things that are resistant to value erosion due to technological change,” he tells Institutional Investor. “If we have a huge amount of technological change, I still think farmland will be valuable, and that means it’s a good counterweight to my investments in trying to make that change happen.”
Banister holds a stake in Farmland LP, a San Francisco–based investment manager that has been acquiring farmland in California and Oregon and converting it to all-organic operations. Co-founder Craig Wichner won’t divulge what proportion of his firm’s investors are tech-focused, but he says Farmland LP, whose fund manages $50 million and plans to raise $250 million more through a private real estate investment trust, has seen “remarkable” interest from tech entrepreneurs and investors.
“These investors recognize that this may be a unique wealth creation time in the tech sector, and they don’t necessarily want to redeploy all of that wealth looking for the next Twitter,” Wichner says. “It’s just prudent investing now to identify other kinds of noncorrelated investments, and real assets like farmland really fit that bill.”
Bay Area angel investor and adviser Owen Van Natta, former COO of Facebook and executive vice president of business at game developer Zynga, invests in commercial and residential real estate. “With real estate, not only do you have something that’s not IT-related — it’s bricks and mortar, physical in nature — but you also get equity appreciation in addition to cash flows if you make smart bets,” he tells II.
These investment choices are part of a broader movement toward real assets. Low bond yields and high equity valuations have driven investors to devote more of their portfolios to the asset class, which can offer higher returns than bonds and less volatility than equities, says Joseph Azelby, head of the global real assets group at J.P. Morgan Asset Management in New York. In recent years Azelby has seen portfolio construction theory evolve from the 60-40 stocks and bonds standard to 35-50-15 in fixed income, equities and alternatives (including real estate), respectively.
The last share keeps growing, he notes. “People seem to like the permanence of office buildings, regional shopping malls, water companies, roads, airports,” Azelby says. “I think it’s the essential nature of real assets that makes people feel comfortable owning them. They like owning assets that matter and that they can understand.”
Interest in real assets has seen a significant uptick, agrees Craig Noble, CIO of Brookfield Investment Management, the $16 billion–plus division of Toronto-based Brookfield Asset Management that oversees publicly listed securities. Although the move from fixed income and equities accounts for much of that growth, Chicago-based Noble adds, “we have seen a lot of allocations coming from other areas as well.” That includes “fast-economy” investors who put much of their money into start-ups, he says.
Ali Partovi, co-founder of web-based advertising cooperative LinkExchange, which Microsoft bought in 1998, and an early investor in file storage service Dropbox, Facebook and online retailer Zappos, is another fan of real assets. Also an investor in Farmland LP, Partovi says he was drawn to the firm because he’s heartened by the social impact of converting farmland to organic — and because it’s a necessary balance to his tech-heavy portfolio.
Many people in Silicon Valley have much of their wealth concentrated a particular tech company, says the San Francisco–based financier. “They want to let that wealth continue to grow but also to balance it by keeping some completely safe.”
He advocates the barbell strategy, whereby investors concentrate their money at two extremes — very high-risk, high-growth and very low-risk — as opposed to buying assets with a variety of risk-return profiles.
For Partovi, farmland-related investments belong at either end of the barbell: He likes start-ups such as New York–based BrightFarms, which develops and runs greenhouse farms near supermarkets in urban areas. But Farmland LP goes at the low-risk end, and he says he’s invested ten times more in the firm’s fund than in any venture “because it’s backed by a real asset.”
