LP Perspectives 2021: LPs aim to keep the momentum on VC investing

Despite the pandemic, recession and social upheaval, most LPs in a VCJ survey say they plan to invest the same or more in venture over the next 12 months. Here’s what else they had to say about the asset class.

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For Venture Capital Journal’s LP Perspectives 2021 Study, our Research & Analytics team surveyed 100 institutional investors to gauge how they viewed the alternative asset classes and their expected activity in the 12 months to September 2021.

Overall, the LPs were largely positive. Keep in mind, respondents were queried in August and September. We wonder how drastically different those sentiments on venture would have been if they were asked the same questions at the onset of the pandemic. No doubt, their views would have been tempered.

But the investment community, particularly within venture capital, answered our queries at the close of summer and were mostly positive in 2020. Take, for example, the question on how much LPs plan to invest in the various asset classes in the next 12 months compared with the previous 12: 29 percent said they plan to invest more in venture funds. In comparison, when asked the same question the year before, only a meager 17 percent said they plan to invest more in VC.

It’s premature to say the painful memories of 2020 are in the rearview mirror. Investors still have to put their money where their mouths are and commit the capital like they said they would in this study. But the trendlines are clear: LPs are bullish on VC.

12-month outlook

Venture fundraising has been robust in recent years, and 2020 looks to be on course for another record amount when all is said and done. There’s reason to expect that the flood of venture firms announcing the close of new funds will continue in 2021. The majority of investors across the private markets landscape plan to increase or maintain the amount of capital allocated to these asset classes over the next 12 months. This is notable within venture, with 64 percent of investors intending to maintain or shift more capital into VC. Only 8 percent say they will invest less capital. That amount of bullishness is exceeded only by private equity.

To go all in or pull back?

The proportion of investors who are currently at their target allocation for venture capital increased to 38 percent, up from 30 percent in last year’s study. It’s interesting to note that only 23 percent of LPs say they are under-allocated to venture capital – less than the other asset classes. Is it better to be over or under? That may depend on returns and what else you invest in. But if returns are good, the over-allocators may not have much to complain about.

Performance matters over past 12 months

For private equity and venture capital LPs, the majority of investors reveal that their investments have met or exceeded their performance benchmark in the last 12 months. For venture capital investors, 55 percent say that performance has met or exceeded their benchmark. That figure is better than real estate, infrastructure and debt. It’s possible that a resurging IPO market and the increase in SPACs have helped fuel the confidence.

Performance outlook

Will a new calendar translate into a fresh perspective and cheerier results? Will blockbuster IPOs continue? Those are the questions on everyone’s minds. The default answer is that 2021 should be pretty good, based on initial expectations. Investors are confident in the future performance of their venture capital commitments. Nearly one-third, or 32 percent, of investors say they expect their VC investments to exceed benchmarks in the next 12 months. Meanwhile, 23 percent say they anticipate their performance to meet benchmarks. Only 12 percent are in the Chicken Little category, expecting the venture asset class to fall below benchmark.

Pick a venture strategy

The study drilled down with those who invest in venture to find out what stage they liked the best. Early stage won out, with 33 percent saying they plan to put more money to work in that stage over the next 12 months. Overall, whether it was early-stage or late-stage/growth funds, the majority of investors plan to invest the same amount or more capital in the next 12 months compared with the previous 12. For seed-stage funds, 22 percent of LPs plan to invest more capital in the next 12 months. Meanwhile, 30 percent plan to remain consistent with the amount of capital committed to this strategy.

Challenging times

Sticking with venture, the study examined the main challenges LPs face when putting money to work in the asset class. The result pinpointed supply and demand. A total of 34 percent of respondents revealed that the inability to secure allocations to the best funds is their main challenge. Difficulty in picking winners, as well as returns not living up to expectations, were also cited as main challenges. The difficulty in due diligence was not a main factor, with only 8 percent citing that as a challenge. This is notable considering the pandemic forced everyone into virtual meetings in 2020, delaying the timetable for completing due diligence.

Virtual problems

How did working from home impact LPs’ ability to invest? The answer is that apparently investors are adaptable. More than 90 percent of respondents said that they would conduct initial meetings with GPs virtually. However, the study did not differentiate between investing in established fund managers and backing emerging VCs, the latter of which, anecdotally, have had a tougher time securing a commitment in 2020. Meanwhile, two-thirds of investors said they would conduct fund due diligence on an entirely virtual basis. Just over half, or 52 percent, of investors would be receptive to investing in fund managers having never met face to face.

The covid impact

The story of 2020 was all about the pandemic and how investors adjusted to the new normal. In light of the pandemic, investor sentiment is evenly split when asked whether they will be less likely to invest with new GPs or not. Only 36 percent of investors plan to be more flexible with GPs when it comes to investing beyond their investment mandate. In light of covid-19 and the protests against racial injustice that erupted in the US, investors say they will stick to their ESG policies. Just 12 percent of LPs are willing to relax their ESG policies as it relates to private markets fund investments. Outside of what the study asked, it will be interesting to see if more LPs make their ESG policies more restrictive.

Attitudes toward climate change

A total of 41 percent of investors agree that GPs are taking the risks of climate change seriously enough in their own investment policies. On the other hand, only 22 percent of investors disagree with this statement.

The importance of D&I

Finally, there’s the matter of diversity and inclusion. Only 13 percent of LPs say they have refused to invest in a GP because it lacked an acceptable D&I strategy. While investors agree that D&I at the GP level is a part of the due diligence process, it’s a minor part. No doubt, this is still being considered and will play a greater role in the future.