Venture Capital investing: conclusion

Venture Capital investing: conclusion

Our CIO Special on venture capital investing examines: • Growth in this area of investment • The wide range of risks involved • Diversification and its potential role in portfolios

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Venture Capital has been an exciting investment area over the last few years and is likely to remain so, particularly given continued financial repression in the form of low interest rates. Amounts invested are likely to continue to grow and Venture Capital will continue to play a key role in funding innovative firms and industries. Over time, Venture Capital returns may continue to beat those available on pubic markets. However, it is important to understand the fundamental differences between Venture Capital and more liquid investment strategies, the risks involved, and how to try to possibly mitigate such risks via diversification and manager selection. We attempt to summarise the main positives and negatives of Venture Capital investing in the table below (see Figure 12).

 

Figure 12: Venture Capital investment: positives and negatives 

Source: Deutsche Bank AG. Data as of August 2021. 

Positives

  • Long-term outperformance of public markets
  • Gain from illiquidity premium
  • Wide range of private firms accessible
  • Only loose correlation of returns with other asset classes 

Negatives

  • Very high risk profile
  • Long-term commitment necessary
  • Diverse VC portfolio advisable given likelihood of individual investment failures
  • Performance may depend on using top quartile funds / best-in-class investors 

For a brief summary of the report and to download the full PDF, please click here.

In Europe, Middle East and Africa as well as in Asia Pacific this material is considered marketing material, but this is not the case in the U.S. No assurance can be given that any forecast or target can be achieved. Forecasts are based on assumptions, estimates, opinions and hypothetical models which may prove to be incorrect. Past performance is not indicative of future returns. Investments come with risk. The value of an investment can fall as well as rise and you might not get back the amount originally invested at any point in time. Your capital may be at risk. This document was produced in August 2021. Readers should refer to disclosures and risk warnings at the end of this document. 050787 010722

Bibliography

  1. Cambridge Associates (2016). The 15% Frontier.
    Retrieved from: https://www.cambridgeassociates.com/wp-content/uploads/2016/07/The- 15-Percent-Frontier.pdf. May 21, 2021.

  2. Cambridge Associates (2020). Venture Capital Positively Disrupts Intergenerational Investing. Retrieved from: https://www.cambridgeassociates.com/wp-content/uploads/2020/01/VC- Positively-Disrupts-Intergenerational-Investing.pdf. May 21, 2021.

  3. Invesco (2016). The case for venture capital.
    Retrieved from: https://apinstitutional.invesco.com/dam/jcr:1f35880c-bdf9-42ea-8afe- ab69b85bc7a4/The%20Case%20for%20Venture%20Capital.pdf. May 21, 2021.

  4. KPMG (2021). Q2’21 Venture Pulse Report – Global trends.
    Retrieved from: https://assets.kpmg/content/dam/kpmg/xx/pdf/2021/07/venture- pulse-q2-2021.pdf. July 22, 2021.

  5. Lerner, J. and Nanda R. (2020). Venture Capital’s Role in Financing Innovation: What We Know and How Much We Still Need to Learn. Working Paper 20-131. Harvard Business School.

  6. Jeong J., Kim J., Son H. and Nam D. (2020). The Role of Venture Capital Investment in Startups’ Sustainable Growth and Performance: Focusing on Absorptive Capacity and Venture Capitalists’ Reputation.

  7. OECD (2004). Financing innovative SMEs in a global economy.
    Retrieved from: https://www.oecd.org/cfe/smes/31919231.pdf. June 3, 2021.

  8. Correlation Ventures (2019). Venture Capital – No, We’re Not Normal.
    Retrieved from: https://medium.com/correlation-ventures/venture-capital-no-were- notnormal-32a26edea7c7. May 21, 2021. 

 

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