Among investors such as high-net-worth individuals, RIAs, and family offices, there is an increasing appetite for alternatives. This was especially evident at the family office conference that we recently attended, where more than half the panels were dedicated to discussing alternative investments such as venture capital, private equity, hedge funds, real assets, and real estate. And RIAs are increasingly asking for alternative investments, such as Schwab’s alternative investment platform that experienced a 70% jump in the past two years, as reported by InvestmentNews.
Reasons for this uptick in interest vary, but the most prominent seems to be the goal for increased portfolio diversification and asset allocation. This especially rings true for investors whose portfolios were hurt badly by the 2008 stock market crash. Now investors are looking for ways to diversify their portfolio, dampen volatility, and achieve uncorrelated return streams.
While venture capital is a segment of private equity, there are several similarities and differences between the two worth noting.
Private equity funds invest and acquire equity ownership in private companies, typically those in high-growth stages. These PE funds purchase shares of private companies or those of public companies that go private and become delisted from the public stock exchange. There are various types of private equity firms, and depending on strategy, the firm may take on either a passive or active role in the portfolio company. Passive involvement is common with mature companies with proven business models that need capital to expand or restructure their operations, enter new markets, or finance an acquisition. While active involvement does not mean the PE firm runs the company on a day to day basis, it does mean that the firm plays a direct role in restructuring the company, reshuffling the senior management, and provide advice, support, and introductions.
What is Venture Capital?
While venture capital is a subset of private equity, there are differences between the two. The most notable difference is that venture capital funds raise capital from investors to specifically invest in startups and small- and medium-size private companies with strong growth potential. Venture capitalists focus on sourcing, identifying, and investing in what they believe are entrepreneurs and startups that will succeed and bring large returns later down the line. Depending on the VC partners’ expertise, VC funds have an industry or sector focus.