The New Frontier Investors by Jagdeep Singh Bachher Adam D. Dixon & Ashby H. B. Monk

Author:Jagdeep Singh Bachher, Adam D. Dixon & Ashby H. B. Monk
Language: eng
Format: epub
Publisher: Palgrave Macmillan UK, London

The Valley of Opportunity

Notwithstanding past failures, it is reasonable to suggest that a select number of capital-intensive ventures will, in the years ahead, revolutionize antiquated industries by becoming commercially viable and indeed scalable companies. Due to the combined effects of climate change and resource scarcity, the green economy is almost certainly not a passing fad. Quite the contrary, we believe that a subset of the green energy and technology companies of this generation will go on to be the most profitable companies for generations to come. And it is this juxtaposition of large past losses next to the potential for future gains that we believe creates an opening for LTIs; we call this the ‘valley of opportunity’.

The problems that capital-intensive industries create for the VC industry actually serve the interests of LTIs. In fact, there are tangible examples of the institutional investment community, and in particular pension and sovereign funds, participating as key financiers of innovative companies and projects (both on the equity and debt side) that sit between venture capital, private equity and infrastructure (see the Innovation Alliance case study below). And yet, for LTIs to take advantage of this situation, they need to re-conceptualize the way they access VC opportunities. Too many pensions or sovereign funds want VC to be easy, but making VC work for LTIs requires far more than writing a cheque and then crossing fingers. It requires meaningful engagement with the asset class and the companies therein.

We have identified three innovative ways in which LTIs are attempting to participate in VC in a more aligned and scalable manner: 17 Direct: a few institutional investors are bringing VC investing in house, building on their experience of direct private equity and direct infrastructure to do direct venture investing in creative ways. The fund that stands out in this regard is the Ontario Municipal Employees Retirement System (OMERS), which had, at the time of our research in 2013, a team of 14 people doing direct VC deals in the US and Canada. They made a name for themselves as one of the ‘go to VCs’ for Canadian entrepreneurs. And they began to manage capital for third parties. This is an attractive model, if you can recruit the necessary people to run such a programme, because it can solve the time horizon problem; OMERS can continue to invest in the portfolio companies as they develop. And that also solves the scale problem, because the winners coming out of the VC portfolio will require ever-larger amounts of capital. Conceivably, the biggest winners coming out of the venture portfolio could be seamlessly passed into the public equity portfolios and even handed off to fixed income teams.

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