A Pension Fund Does Away with the Middleman: the VC

Plenty of new platforms are trying to marry LPs with direct stakes in privately held startups, including Xpert Financial. In fact, its CEO, Thomas Foley, told me last summer: “I think a lot of people have grown less comfortable paying another group 25% in fees” given other alternatives to emerge.

At least one pension fund agrees. In what could conceivably become a model for other institutional investors, Ontario Municipal Employees Retirement System, which oversees $53 billion in assets, has created its very own venture capital arm, OMERS Ventures. The idea? To invest $180 million over three years in everything from seed-stage consumer Web startups to pre-IPO clean energy companies, in amounts ranging from $500,000 up to $30 million.

The news is startling for a variety of reasons, not least of which is that $180 million is an enormous amount for a Canadian outfit. As the Globe and Mail observed in its own news about OMERS Ventures, total VC investment in Canada totals roughly $1 billion a year, “and roughly one-third of those [deals] are made by American players.” (OMERS Ventures will invest predominately in Canada.)

Of course, more shocking is a pension that’s willing to kiss off VCs as financial intermediaries. “OMERS wants to directly invest 90 percent of our [VC] assets,” says OMERS Ventures’ CEO John Ruffolo. The remaining 10 percent of OMERS’ allocation to VC will come through outside fund of funds, he adds.

Ruffolo insists that OMERS isn’t focused on cutting out the middleman “as a general trend.” In fact, OMERS has been evolving into a much more direct investor over the years, with two of its four major asset classes – real estate and infrastructure – comprised of assets acquired almost entirely through direct investments. Over time, says Ruffolo, such a “direct investing approach has permeated the organization, and it’s how we want to do our business.”

Ruffolo adds that he’s “aware that a number of other capital pools are thinking about [adopting direct investing models]. But this isn’t something that just popped up. It’s part of a long-term evolution [for OMERS]. When you have your own people on the ground, you have more insight into the markets and can do more to control your own destiny. When you go indirect, it’s just more challenging to do.”

Asked if Ruffolo’s team will be paid with traditional venture capital incentives, including carry, he declines to discuss “payment mechanisms.”

But he says that “it’s important for us to hit our investment return thresholds. At the end of the day, we need to pay off our pensioners. If we don’t, we won’t be doing [VC] for very long.”

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1 Comment

  • It is the right concept to reduce the 10 levels of bottom-heavy diversifaction in the deployment of risk in Venture Capital that prevents it from producing viable returns moving forward. And with mostly subprime VCs populating the ecosystem today, the temporal opportunity to remove them may help certain LPs cross the time bridge of change.

    But Venture Capital arbitrage is needed to produce viable returns, as long as you don’t populate it with subprime arbitrage. So, what pensions should focus on is an economic framework that deploys the proper (non-uniform) risk with people who have the merit to spot it. And then force the deployment of non-uniform risk that made Venture Capital so valuable in its inception.

    The concept of Venture Capital arbitrage is not broken, the execution is. And I wonder if a soccer game without a (highly merited) referee is actually better than one with a bad referee. Especially when we’ve been living with 20-years of bad VC referees.

    Best,

    Georges

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