Superannuation fund early leaders in the venture capital space are proving resilient even amid the carnage in technology stocks which has seen the technology-heavy Nasdaq down over 31 per cent this year.
Price earnings ratios are at six-year lows, increasing pressure on some private market investors to slash valuations. Despite the turmoil, Hostplus chief investment officer Sam Sicilia said his view on venture capital “has not changed one bit”.
Hostplus is one of the early leaders among Australian funds along with AustralianSuper and both funds house their venture capital holdings with private equity investment in their asset allocations.
AustralianSuper is holding $13.8 billion in the sector, amounting to five per cent of assets under management with a target to increase to seven per cent. The asset is run out of New York by head of private equity Terry Charalambous which shows where the focus will be. Australian venture capital investments are around $300 million with Square Peg and Blackbird the major holdings.
At Hostplus, private equity accounts for around 12 per cent of the fund with around $3 billion invested in venture capital. The bulk of the money is invested in Australia with around 30 per cent offshore, in contrast with equities where more is invested offshore.
This is in part a function of time with Hostplus first going into venture capital in 2014, followed by co-investment in 2016 then moving offshore in 2018.
Sicillia said like all managers, you need to invest according to your membership which in his case means 1.5 million members with an average age in the early 30s. “This means we have an ability to withstand illiquidity,” he said.
Hostplus uses external managers across all asset classes for all his investments, based on Sicilias’s view it is better to have funds being managed by “the experts who are closer to their markets”.
With venture capital, Sicilia is selective based on management expertise, so fintech and software as a service (SAS) investments are handled by Paul Bassat at Square Peg, bio tech by Brandon Capital, Blackbird for technology and SAS also at Airtree.
There is obviously some overlap but specialisation is key. In terms of valuations, any write downs happen first with the manager who then passes them onto the investor which in the case of a super fund has two days to reflect the change in their unit prices. “Most investors can’t stomach illiquidity but we can,..which is why we have a higher allocation’’, he said.
UniSuper’s chief investment officer John Pearce takes a different view and has lower venture capital allocations than his peers arguing the risk is too great. “When you are managing with the aim of getting CPI plus four per cent there are plenty of ways to get there without chasing high growth in a balanced fund,” Pearce said.
“This is particularly so in a period of rising rates,” he added.
Asked why he invests in venture capital, Sicilia said “it all starts with venture and in time many become larger companies. We expect outsized return for the risks we take.”
“Our companies create employment and could end up disrupting bigger companies so we have a natural hedge,” he added. But he stressed “we are not here for charitable purposes, we are looking for the potential for high returns and disruptive risk.”
His big investments have some advantages. “As we put more money into the field, costs reduce because our fees are lower and that makes it easier to post positive returns, he told Investment Magazine in an interview.
He noted the investments should be considered as part of a wider portfolio where you have different assets which do well in different scenarios. “Obviously right now it is a worse environment but the benefits of venture capital remains,” he said.
Square Peg recently announced the closing of a $860 million fund, showing there is money still going onto the sector, despite the selloff in public markets. Bassat noted there was upside to a change in valuation as there was no longer a mad rush to raise money and instead the company founders can concentrate on what they are developing.
“The founders should be making the same decisions no matter what the market is and now there is less noise so it’s a great period to create value,” he said.