Family Offices and Ultra High Net Worth Individuals are today major players in the ecosystem, looking for investments converging with family values, unifying intergenerational experiences, while securing wealth transition.
The goal is not only to generate high returns on capital, but for entrepreneurs to also have a positive impact on our society. Making such meaningful investments enables an intergenerational bridge across generations, combining youth driven new tech insights, with the wisdom and experience of the elders.
Many families are concerned with multigenerational wealth transmission, comfortably accepting the illiquidity constraints of illiquid and private market investments for the benefit of uncorrelated higher long term performance.
This is further confirmed when looking at the evolution of the strategic asset allocation for families over the past decade. For example, VC allocation has increased from 7% to 15% over the last 10 years alone. However, while this is true for institutional investors, family offices and UHNWI are still lagging in ramping up their VC portfolio allocations.
Top-performing institutions such as endowments and pension funds offer key learnings.
Endowments are among the best institutional investors and are usually showing the path to best returns. University endowments such as Yale are frequently cited as a role model by other investors, being early allocators on new successful trends.
These investors are comfortable with the long-time horizon, illiquidity inherent in alternatives investments allocations, using a portfolio allocation model popularized by David Swensen, also known as the “Endowment Model”. This model emphasizes higher allocations toward illiquid private markets offerings such as VC.
Venture Capital (VC) investments are a perfect match to meet an investor's expectations, and are a key to integrate in one's portfolio, presenting a compelling risk/return profile.
VC has a multi-decade proven track record for leading institutions such as endowments; one can note outperformance of the VC asset class across any time horizon.
The figure herein shows the performance of different asset classes over a typical holding period of 10 years
Historical IRR of Alternative Investments*
…with manageable risks
Private investors are often more risk averse than institutions such as Endowment funds.
The main risk cited for VC is often the permanent capital loss. However, over time, track records show that such risk is efficiently mitigated through:
a disciplined investment strategy across sectors, geographies and a diversified universe of entrepreneurs
the emergence of a new paradigm, favoring Camels over Unicorns; profitability is now taking center stage as opposed to a history of an unchecked ego boosted obsession of top line growth at any cost
the maturity of an ecosystem around start-ups (incubators, accelerators, a comprehensive community of advisors, etc.) supporting entrepreneurs as well as fund managers with key resources aimed at optimizing market fit and scaling the business
the continuous shift to an ever more digital world, spurring the need for tech disruption and creating untapped opportunities timely fostered by the COVID-19 crisis
a new breed of better trained, better experienced talented entrepreneurs and fund managers, with the right set of skills, network, and experience, built from the ground up on the back of two decades of unrestricted development
We are witnessing an unprecedented growth spur in Europe's VC ecosystem. A key indicator of the old continent's competitive advantage in this new era when compared to any other market
Europe lags behind other developed digital economies. For example, looking at GDP, there are 3x more VC investments (in value) in the US than in Europe. As a matter of fact, Europe was late to the party initially hosted by the US and China. However, Europe has positioned itself today as an uncontestable breeding ground for high potential innovation; its world class technological hubs, the quality of its talent pool, and a comparable GDP to the US, are accelerating moving it to the front of the pack as it plays capital catch up.
As such, VC investments are constantly and continuously growing at an impressive pace in Europe (+39% annual growth in 2019), while the US is exhibiting a decline (-1%).
Europe is clearly at a turning point and has its eyes set on regaining its first class seat in the global race for innovation: the level of ambition, the availability of capital, and the government support (both at a European and national level) are now at a significantly better scale and with a clear capability of filling the gap vs other leading nations.
Unprecedented market conditions will yield unprecedented opportunities for VC investors in Europe
Of the portfolio invested in VC...
...in European Tech start-ups...
...at Early Stage