SL Advisors'  Instablog

SL Advisors
Send Message
Following 23 years with JPMorgan, Simon Lack founded SL Advisors, LLC, in 2009. Prior to that, Simon was CEO and founder of the JPMorgan Incubator Funds, two private equity vehicles that took economic stakes in emerging hedge fund managers. From the late 1980s through 1999 through several bank... More
My company:
SL Advisors, LLC
My blog:
In Pursuit of Value
My book:
The Hedge Fund Mirage – The Illusion of Big Money and Why It’s Too Good to Be True
  • The Venture Capital Mirage 0 comments
    May 10, 2012 4:29 PM

    The Kauffman Foundation in Kansas City, MI is to be commended for the open manner in which they've shared the results of their own venture capital (NYSE:VC) investing. In a remarkably candid appraisal that covers twenty years of experience, the authors reveal that much of the conventional wisdom about this area of private equity is wrong. Larger funds reliably underperform smaller ones; fees eat up disproportionate chunks of performance; investors too easily sign up for second tier managers in order to deploy capital that's "burning a hole in their pockets" while top tier funds seem to be the only way to justify the risk (as long as they don't grow too big).

    The authors, who include CIO Harold Bradley, note with irony that while venture capital funds search tirelessly for new business models and innovation there has been remarkably little of this in the vc industry itself. Fees of 2&20 with limited transparency around GP compensation have prevailed with remarkably little change. The report also notes that while vc funds demand complete transparency around the financials and compensation of the companies in which they invest, they generally refuse to provide anything similar to their own investors.

    Kauffman reports that only 20 out of their 100 vc funds beat a public equity market equivalent by more than 3% (a modest reward for illiquidity) and that half of those began investing prior to 1995. They also find that the "J-curve" (which holds that early negative returns quickly improve as investments mature) doesn't really exist.

    In many ways what's wrong with vc investing is similar to what's wrong with hedge funds. Their findings echo my book, The Hedge Fund Mirage. Too much money chasing returns; LPs that don't press for better terms. Poor transparency.

    The Kauffman Foundation should be applauded for their open approach to discussing issues that demand more attention. I hope their step forward provokes other investors to similarly examine their own results.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Back To SL Advisors' Instablog HomePage »

Instablogs are blogs which are instantly set up and networked within the Seeking Alpha community. Instablog posts are not selected, edited or screened by Seeking Alpha editors, in contrast to contributors' articles.

Comments (0)
Track new comments
Be the first to comment
Full index of posts »
Latest Followers

StockTalks

More »
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.