Investing in venture can help family offices make a lasting impact on their balance sheet and society.
A recent report from Cambridge Associates highlights that there is a potential suite of long-lasting benefits for family offices and institutions that invest 15 percent to 20 percent of their portfolio into venture.
The risk profile typically associated with venture has softened over the last 20 years as the market no longer is divided by strict winners and losers, the report stated. The capital loss ratio dropped from 50 percent to 20 percent over that time.
Liqian Ma, a managing director and head of impact investing research at Cambridge Associates, said that while many investors still associate venture with its former heightened risk profile, the asset class can be a strong option for family offices with proper diversification and successful partnerships.
“How you construct a well-diversified portfolio and how you select managers is critical to success,” Ma said.
Ma said that these managers no longer have to be the top-tier names in the industry, either. He said their clients have found success across the market and have worked with smaller shops and emerging managers.
Ma said that they typically recommend working with managers that generate the majority of their revenue through carried interest, as opposed to management fees, and who differentiate themselves by focusing on a specific sector or stage of investing.
Ma said that they typically avoid the later-stage market because of the high valuations and the froth that currently resides there.
“There is some opportunity in that later-stage market but the most attractive is still at the earlier stages,” Ma said. “You are getting in with a highly talented entrepreneur or team at the ground floor and riding the story up with them over time.”
The sectors that are particularly attractive right now include manufacturing, AI, construction and software, he said.
He added that while his US clients have a strong exposure to the US and China VC markets, they see success with the managers in emerging markets, as well.
In addition to returns, Ma said that family offices that are looking to put their money toward making a difference in the world or a positive impact on society have plenty of opportunities in the venture market.
“There are a lot of entrepreneurs trying to solve really important challenges,” Ma said. “There are entrepreneurs that are more mission driven, that are still trying to generate returns. We are finding the venture managers who are backing them.”
The report concludes that with many VC funds targeting returns of up to 300 percent, venture offers family offices a way to make money to pass down for years to come.
“Venture is one of those rare parts of the market where you can get pure play exposure to innovation with a new set of opportunities that can impact our society and economy,” Ma said. “It plays a really strong role in the portfolio.”