Gently Interrogating Brad Young

I was just on the phone with Brad Young, the U.S. head of London-based investment advisory firm Altius Associates. Young also spearheads the venture capital efforts of the firm, whose clients include some enormous pension funds, including the California State Teachers’ Retirement System, the Teacher Retirement System of Texas, the Employees Retirement System of Texas, and the Maryland State Retirement and Pension System.

Young, who ironically calls himself an old guy when asked his age (he’s all of 44), has been in the business for about a decade. Before joining Altius four years ago, he was the director of private equity at MIT for a year; before that, he was in charge of the University of Richmond’s domestic private equity portfolio for about five years.

In between meetings at his Richmond, Virginia, office, he let me ask him a few general questions about LPs’ views on venture capital right now.

Q: What’s the most common concern about VC that you hear from institutional investors?

A: It’s just very hard to render judgment on VC firms that either have no track record, or a track record that’s not very strong for last five to ten years. And let’s face it: you’re looking at period of bad returns right now.

Q: What’s the second most common concern? I promise I won’t ask this question 10 times.

A. The number two concern? Usually at this part of the cycle, if you buy into the counter-cyclicality of buyout and venture returns, you’d usually see something in the public markets that would lead you to think the IPO market would be stronger and support venture returns. But the IPO market probably isn’t going to look strong for another year or two.

Q: What do you personally think? Do you subscribe to the counter-cyclicality theory? If so, do you think VCs have a problem on their hands?

A. You know, a lot of people say that the VC model is broken. I’m not sure I buy into that. Then again, I’ve never been a person who thought the model could scale. I like smaller firms. I have a bias. I like four partners around the table, versus a much bigger team and processes.

Q: Let’s say I was a VC with a solid track record and I wanted to start a new fund. What kind of mandate might get your attention?

A. Clean tech! I’m kidding. Renewable energy is something that interests me but not at the early-stage level. What interests me would really depend on what the group’s track record is. We still look at a lot of healthcare and IT.

Q: But more specifically what might interest you — or would you rather I came to you with a more general mandate?

A. That depends on the kind of portfolio that I’m building. Some portfolios would support that type of narrow strategy, instead a generalist fund that invests across a bunch of different sectors. My perception, too, when you’re talking about a narrow concept is: what’s the size of the market and is it faddish? Also, is it subject to some sort of government payoff? For example, some healthcare-oriented ventures are, and that’s not something I’m comfortable with.

Q: What sectors would you right now tell your clients to avoid?

A: I don’t specifically warn them about sectors, though I do have concerns about clean tech because of the amount of money being deployed there and the number of people with no track record in the industry. At the same time, I’m not going to say that it’s not a viable opportunity. I can’t generically say: stay away from the Internet.

Q: Has the credit crunch impacted how much LPs are allocating to venture firms?

A: No, not at all. We haven’t see anyone saying, “We can’t deploy our money in buyout markets, maybe we should turn to VC.” There’s been no effect on LP cash flows into venture that I’ve seen, not within our client base.

Q: There’s a lot of money flowing to the venture industry, though. Last year there was something like $35 billion raised by VCs, the highest level since 2001.

A: My sense is that there’s more of an equilibrium in the venture market right now, and that it’s just smaller than buyout market. I doubt you’ll see the money raised double, or conversely, drop to $15 billion. I think people who are philosophically comfortable with venture are already there.

Q: What’s the most important lesson you learned from being an LP yourself?

A: That it’s important not to make decisions in a vacuum, and that calibration to the sector you’re investing in is critical. A lot of this has to do with pattern recognition.

Q: I completely don’t understand what you just said.

A: There’s no way to make a good decision without meeting a lot of managers and calibrating to the universe they inhabit. A lot of people will meet a quarter of the universe and think they know what an “A” manager is, and I think that’s probably one of the biggest mistakes people make.

Q: So you’ll take a meeting with anyone?

A: Actually, yes, it’s an open door policy. It takes a lot of time — more resources than people think — but that’s when you can find some really interesting strategies. You also realize that what looks good on paper might not be so interesting, and that what doesn’t look good on paper might be great.