When the coronavirus broke out in March, capital allocators braced themselves for significant losses. Venture capital was one of the asset classes where LPs anticipated shrinking portfolios.
But public markets, especially tech stocks, swiftly recovered from initial pandemic fears, and VC investments followed suit. Despite taking some markdowns in Q1, most later-stage VC funds gained back lost ground and then some in Q2, while many earlier-stage funds decided to take a “wait-and-see” approach to valuations. That is according to Venture Capital Journal’s discussions with half a dozen LPs and GPs.
Now the evidence of VC’s resilience is beginning to come in. The University of California Regents is the first major public LP to report venture capital fund performance as of Q2. The detail is telling.
Venture showed exceptional performance and was the strongest asset class in UC’s $14 billion endowment fund, returning 30.3 percent during the fiscal year ending in Q2 this year. VC returns within the LP’s $70.2 billion pension portfolio were less impressive, but still admirable at 14.8 percent.
VCJ also compared each of UC Regents’ funds’ VC performance to last year’s returns. Of about 30 vehicles with the vintage year 2011 or later, only two funds had a small erosion in value over the course of the fiscal year.
The first pullback is from Canaan IX, a 2012 fund, which saw its investment multiple decrease from 2.17 to 2.04 during UC Regents’ fiscal year. The House Fund II is UC’s other VC investment that had its return on investment take a step back. The second House Fund – which closed late last year on $44 million to make seed investments in start-ups with ties to UC Berkeley – is young and could still be on the down-sloping side of the J-curve, a return trajectory of many venture funds where initial loss is followed by dramatic gains.
Performance trending up
Most other funds in UC’s portfolio saw a healthy performance, with the highest advances registered by GGV V, a 2014-vintage $620 million fund, and Vertical Venture Partners, a 2015 enterprise technology-focused $50 million fund.
Other notable strong holdings in UC’s portfolio include funds from Sequoia Capital, Khosla Ventures and The Column Group.
UC Regents’ private equity portfolio experienced volatility in the first half of 2020, but the pension and endowment portions of the portfolio generated strong positive returns and outperformed the policy benchmark, said John Beil, managing director of private equity investments, during an investment committee meeting in late July.
While Beil did not directly address VC assets at that meeting, he said that the LP’s overweight investments in the technology and life science sectors is one of the reasons the overall PE portfolio beat its benchmark.
UC Regents’ venture program was started in the late 1970s. Over the years, the LP has invested in many leading VC funds. But sometime in the early- to mid-2010s, UC stopped re-upping with many of these firms, including Accel, Redpoint Ventures, Canaan Partners, Bessemer Venture Partners, Mayfield and ARCH Ventures. The idea was to reduce the number of managers across all asset classes.
A person familiar with UC Regents’ investment strategy told VCJ that the LP may be interested in rekindling relationships with some of the LP’s previous VC partners. Competitive GPs, however, do not usually allow LPs to skip funds.
While UC continues to re-up with less than a handful of established brand-name firms, namely GGV Capital, Khosla Ventures and Sequoia Capital, the LP has added select emerging managers to its VC roster. A recent UC Regents commitment was $25 million to Vida Ventures’ second fund, a $536 million bicoastal life sciences firm founded in 2017.
David Larsen, managing director with Duff & Phelps’ valuation advisory practice, said that he is not surprised that UC’s VC portfolio showed strong returns. “I don’t want to overgeneralize, but the outlook is positive for venture capital,” he said.
He added that while the asset class is seeing winners and losers, the number of start-ups that have been impacted by the pandemic is outweighed by companies that are either benefiting from the health crisis or whose long-term financial impact is still unclear.
Larsen said that he is beginning to review GP performance for Q3 and results are favorable. This means that other LPs are likely to show strong returns for their VC portfolios.