Demand rising for venture funds of funds, says Geneva Venture’s Sill

Igor Sill, Silicon Valley venture capitalist and managing director of Geneva Venture Group, says venture fund of funds are becoming increasingly attractive to Wall Street investors seeking returns from the sector.

The global venture capital industry is undergoing major changes as Wall Street embraces dozens of new initial public offerings (IPOs) of venture-backed companies. Hopeful investors are again flocking to this Alternative Asset class as these venture capital investments continue to deliver positive returns at a better rate than public market indexes such as NASDAQ, FTSE or S&P. The venture-backed technology sector led on NASDAQ trading volume with 44 companies going public last year.

As pensions, endowments, Family offices, foundations and institutional investors increase their venture allocations, they are also applying closer scrutiny of reported venture fund performance. These investors are recognizing greater opportunities to generate excess returns but are resource constrained on due diligence, accurate performance comparisons and audit reviews. Many seek advice from independent accounting firms and law firms to decipher reported returns. And many delegate the oversight function to specific fund advisory organizations. A recent study by Casey & Quirk projects that outsourced investment assets in the United States alone have grown to $510 billion as of this year.

These investors are rightfully concerned with fulfilling their fiduciary duties by selecting specific venture funds and fund managers with proven market segment expertise. Understanding which market sectors are most likely to outperform, coupled with identifying capable fund managers to exploit those opportunities are a critical component of the investor’s decision making process. The goal remains to seize the benefits of higher overall returns coupled with lower investment risk.

Further complicating the process is the venture industry’s notorious lack of transparency relative to their fund’s actual performance. A venture fund series financing in one invested company may report a value considerably different than the same series investment by a co-investing venture firm.

Since reporting of venture equity returns is a relatively unregulated process, some firms tend to self-report questionable quarterly performance to public databases and publications so as to attract further investment capital. Researching public data results from sources such as CalPERS, Red Herring Limited, Preqin and other Venture rankings tends to provide a more accurate picture of actual returns. The top tier performing venture capital firms achieve internal rates of return (IRR) in excess of 30%.

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