8 Questions for Bob Long, Conversus Capital

I recently asked Bob Long, the CEO of publicly traded fund-of-funds Conversus Capital, a few venture-related questions.

For those who aren’t familiar with Conversus, it was born out of one of the largest secondary transactions in history, when it acquired its initial portfolio of 168 funds for approximately $1.9 billion from Bank of America. Today, Conversus commands a $2.2 billion portfolio of interests in 215 private equity funds and direct investments. Eighty percent of its holdings come from funds closed in vintage year 2004 or earlier. On top of that, the firm — based in the Channel Islands but with offices in Charlotte and Chicago — is on the hook for some $927 million in unfunded commitments.

Q) How many of the 49 venture fund holdings of Conversus have come through secondary opportunities, and did all of them come through BofA?

A) The initial portfolio included 41 of our 49 venture funds. We have committed to 3 new, primary venture funds since our formation and acquired 5 others in secondaries in two separate portfolio acquisitions.

We expect to close the last portion of the Calpers secondary deal in the second or third quarter and that will include some additional venture investments in addition to those above.

Q) You’ve said that Conversus strives to commit 60 percent of its money to primary investment stakes, 20 percent to secondary purchases, and 20 percent to direct co-investments. Is that true of both buyouts [which account for the bulk of Conversus’s assets] and venture capial?

A) We don’t differentiate among investment styles [quite that way]. The 60/20/20 split is designed to keep our overall portfolio on the up-swing of the J-curve and help us build NAV steadily over time.

That said, acquiring top-tier venture funds on the secondary market is especially challenging, and we are very pleased with our success to date in doing so.

Secondaries allow us to acquire assets at attractive prices and drive NAV growth and also allow us to dynamically adjust style (VC vs LBO), vintage year, geography and other diversification parameters.

Q) In terms of primary investments, what are Conversus’s investing parameters? How does it decide on a team? Will it back an emerging fund if the partners don’t have a track record together yet have performed well individually? What’s it’s the smallest investment in a venture fund that it has made? What’s the largest?

A) Conversus is currently invested in numerous top-tier firms. Members of our investment team have, in prior roles, invested in scores of other venture funds and evaluated hundreds more.

Conversus has a very large and diversified portfolio of top-tier funds that is mature and cash flowing. With our portfolio and permanent capital base, we are well positioned to take a long-term perspective on sectors and teams. Our investments reflect perspective and we have backed new teams and strategies.

We generally target $10 million to $25 million for a primary venture investment. On the secondary side, our portfolio acquisitions have included smaller positions in individual venture funds.

Q) What are your thoughts right now on VC as an asset class, relative to buyouts? Does you think things are going in the right or wrong direction? A lot of LPs are saying that if they can’t into top-tier firms, they aren’t bothering with VC because it doesn’t make sense.

A) No, we appreciate the challenges faced by entrepreneurs and the rewards. Technology has been and will remain a growth engine of the US and global economy. We think the health care sector will experience above-average growth over the foreseeable future, and venture allows our investors to participate in that growth.

We’re also looking to provide liquid access to top-tier private equity. The premium returns from investing in the top quartile venture managers, vs. average performers, is enormous and well documented.

Q) Are there certain sectors of investment you like particularly?

A) In general, we prefer to target the best managers who have a proven ability to identify and exploit the most promising sectors, rather than making sector selection bets ourselves.

Q) How interested are you in investing abroad? (Or, I should say: how interested are you in VCs that are investing abroad?)

A) We have invested in off-shore venture funds and selected firms based in the US that invest globally. For US firms investing globally, we focus on proper staffing, differentiated local networks and appropriate investment oversight.

Q) What do you like least about investing in venture funds?

A) Investing in top-tier venture firms means evaluating unrealized investments and less proven portfolios, a process characterized by shorter review cycles and smaller allocations. Limited access to top-tier funds is leading certain investors to abandon the venture component of their investment strategy, and that limited access is presenting an opportunity for Conversus, with our permanent capital dedicated to private equity, to gain larger allocations in top-tier funds.

Q) What’s most appealing to you about the asset class?

A) Venture presents the potential for out-sized returns as compared to LBO investments.