Mark Yusko, the well-known investor who runs Morgan Creek Capital Management, believes that early-stage venture capital is an evergreen asset class.
“There will always be innovative technologies with value potential,” he told Venture Capital Journal.
Morgan Creek, which manages $1.6 billion as an outsourced CIO and a fund-of-funds, is currently overweight early-stage venture, but takes a negative view of late-stage VC, Yusko said.
“Capital and investment returns are inversely proportional,” said Yusko, who founded the Chapel Hill, North Carolina-based firm in 2004. Late-stage venture funds are getting heavily funded, which is not favorable for that portion of the asset class, he explained.
While there is no shortage of capital going towards early-stage venture funds, it is possible to find areas with good value. This is why Morgan Creek believes that the greatest opportunities are with emerging managers.
“Historically, we like to be early to new funds. Funds one, two and three,” said Yusko who serves as Morgan Creek’s CIO and CEO.
He did not provide a list of Morgan Creek’s current VC managers, but said that at one point in his career he was an early investor in Benchmark and True Ventures. But Morgan Creek is no longer backing those firms, he said.
Yusko made a name for himself running the endowment for the University of North Carolina at Chapel Hill from 1998 to 2004. He transformed UNC’s portfolio from a traditional one comprising public equities and bonds to one following an endowment model, a style of investing that diversifies across asset classes and has a large portion allocated to private and alternative assets.
Morgan Creek was founded with the idea of bringing the endowment model of investing to high-net-worth individuals, family offices and institutions. Currently, about 60 percent of assets come from institutions, Yusko said.
Since one of the central tenets of this investment style is that private assets are offered a premium for taking on illiquidity risk, 80 percent of Morgan Creek’s AUMs are held in private assets, Yusko said. And 25 percent of the private portion is allocated to venture and growth equity, according to the investor.
Although Yusko believes that it is always possible to find opportunities in early-stage venture capital, he thinks the asset class tends to have cyclical performance. “There are massive periods of technological growth, and that’s the right time to enter venture,” he said.
In Yusko’s opinion, we are on the brink of those periods with blockchain. As one of blockchain’s and cryptocurrencies’ biggest investment evangelists, Yusko believes that blockchain will be as revolutionary over the next 10 years as the introduction of the internet was two decades ago.
Last year, Morgan Creek launched a $40 million Morgan Creek Blockchain Opportunities Fund, a direct fund that invests in equities of startups and blockchain protocols. Yusko is planning to double down on the crypto investment theme. The firm is gearing up to raise second $250 million blockchain fund, he said.
Although the majority of Yusko’s conference presentations and TV appearances are focused on blockchain evangelism, Morgan Creek continues to back traditional venture capital firms. The firm is interested in backing small funds, below $300 million and even sub-$100 million funds, he said.
Areas of interest are fintech, health, agtech, ecommerce, SaaS, robotics, and energy tech, according to Yusko.
“We definitely like sector-based funds, for instance, healthcare only, fintech only,” he said.
The firm has about 25 venture and growth equity partners across all geographies. While Yusko considers too much capital has entered late-stage VC, the investor thinks there are massive growth equity opportunities in China.
“This trend will persist not despite of, but because of trade wars with the U.S,” he said. As China’s economy continues to develop, the country’s growing middle class is seeking home-grown innovative healthcare and consumer technology offerings, he explained.
In 2017, the investment firm closed a $46 million New China Fund and is currently in the process of raising a much larger fund following a similar strategy, according to Yusko. China is clearly an important theme for Morgan Creek. Out of 13 investment professionals, five are based in Shanghai, said Yusko.
The firm’s latest investment partner in China is Quan Capital, a $275 million healthcare-focused VC. About 30 percent of all China-based investments are co-investments and direct deals, he said. The firm previously backed the ecommerce company Alibaba and is now an investor in the mobile transportation platform company Didi Chuxing.
Morgan Creek is also active in co-investments and direct placements domestically, via special purpose vehciles. Over the years, the firm has raised 29 SPVs for investments in Uber, Lyft and Beyond Meat, among others, Yusko said.
As for funds pitching Morgan Creek, Yusko said the firm has an “open-door policy” and will meet just about anyone, but is most interested in hearing from managers who spun out of larger organizations.
“We add several VC managers a year,” he said, “but lately many of those have been based in China or active in blockchain.”
Besides early-stage venture and China growth equity, Morgan Creek likes to allocate its private equity assets towards small buyout firms with fund sizes below $500 million.
While the firm does not share overall performance data, Morgan Creek’s assets under management have been on a steady downward trajectory. In 2017, the firm had $2.3 billion in AUMs, while the year prior they were $2.9 billion, according to data from executive search firm Charles Skorina & Co.
Only time will tell if firm’s latest bets in venture capital and other asset classes are helping Morgan Creek to recapture at least a part of its declining asset base.
LP Profile: Morgan Creek Capital Management
DESCRIPTION: A fund of funds and an outsourced CIO.
TOTAL AUM: $1.6 billion
SIZE OF VC AND GROWTH EQUITY AUMs: 20% of total AUMs, approximately $320 million
SAMPLE OF VC FUNDS: Declined to provide, but “was previously involved with Benchmark and True Ventures.”
MOST RECENT COMMITMENT: Quan Capital
FUND SIZE PREFERENCE: Below $300 million
TYPES OF FUNDS IT WON’T INVEST IN: Any fund that’s $1 billion or larger. “I am wondering how they can deploy all that capital, though NEA has been doing well,” said Yusko.
INVESTMENT SECTOR PREFERENCE: fintech, health, agtech, ecommerce, Saas, robotics, 5G and energy tech.
INVESTMENT STAGE PREFERENCE: Early stage, with a specific interest in seed. Growth equity in China.
GEOGRAPHIC PREFERENCE: 60% in North America, 25% in China, and the rest in Europe and Latin America
TYPICAL COMMITMENT SIZE FOR VC AND GROWTH EQUITY FUND: Writing checks between $5 million and $10 million, but have written even smaller checks for certain vehicles.
CO-INVESTMENTS AND DIRECT PLACEMENT: Participated in at least 29 such deals. The latest investment was SpotHero’s $50 million Series D round, according to Yusko.
TOTAL NUMBER OF VC AND GROWTH EQUITY MANAGERS IN PORTFOLIO: About 25.