Some investors are scaling back their venture capital commitments because they can't find good managers or still have a lot of unfunded commitments.
In the meantime, many have turned to the secondary market.
The $25 billion Los Angeles County Employees' Retirement Association, Pasadena, is typical. "Our goal is to find the best managers we can," said Chris Wagner, senior investment officer for alternative investments. "Our venture allocation is near the bottom of our target, so we'd like to boost that, but if we don't find good managers, we won't put more money into it."
LACERA's target for venture capital is 15% to 35% of its private equity portfolio, which currently stands at $1.2 billion. The venture component is around $180 million.
"I hear the values are better now, so it's a good time to invest," Mr. Wagner said.
"But then the question becomes: `What is the technology that is going to start a boom?' The Internet and disk drives were two breakthrough technologies that helped a lot of venture firms make a lot of money. Meanwhile, a lot of venture funds have been cutting their size because they can't find the right opportunities. No one has the crystal ball to tell them the best place to invest next."
Mr. Wagner said he's been looking at funds that invest in middle-market companies and Europe.
The State of Wisconsin Investment Board, Madison, has slowed its commitments to all private equity in the last 18 months, and particularly venture capital, said portfolio manager Jon Vanderploeg. "There haven't been many quality groups out there, but we're still looking.
"In the last half of the '90s, the board committed $300 million to eight to 10 funds a year, but last year the amount was reduced to $200 million a year to five funds." He said he'd be surprised if the board commits to that many this year.
"It's early to add to venture because performance will probably be poor for the next year or two," he said. But he has his eye on secondaries and plans to add more. He expects the best ones will come on the market in about two years, when disenchanted investors become highly motivated sellers.
Mario Giannini, chief executive officer at private equity consulting firm Hamilton Lane Advisors, Bala Cynwyd, Pa., said institutional clients have been taking their time about making new commitments to venture. "They're in no rush. They are being more selective, more careful. Some are scaling back their exposure and slowing their pace; they may feel there's no reason to run and do the next fund that's being offered. They used to look at everything; now they're being more strategic, considering investments over a five-year period, and how they fit in with the rest of their portfolios."
Yet to be drawn down
At the Memorial Sloan-Kettering Cancer Center, New York, 20% to 30% of the $170 million committed to venture over the past three years has yet to be drawn down, said Michael Gutnick, senior vice president-finance. Sloan-Kettering has a $1.7 billion endowment.
"Early-stage venture is still a good long-term investment, and we will invest in it again. But there's still a lot of our venture money that hasn't been called," Mr. Gutnick noted. "We're not going to add to venture now. We're waiting for our existing partners to come back for another round of fund raising." In the last year, he has made commitments only to secondaries. "They offer great opportunities, but too many people are getting into those now," he added.
Unfunded commitments also are a concern at the $5 billion Montana Board of Investments, Helena. "We don't want them to get too big, so last year we scaled back our venture investing by $5 million to $10 million," said James Penner, chief investment officer.
"Previously we'd been committing around $40 million a year to venture. However, the board did increase its overall allocation to private equity last year to 7% of assets from 5%, in order to broaden it and add secondaries." Montana has around $120 million in venture investments.
The pace also has slowed at the University of Texas, Austin, according to Sara McMahon, managing director of non-marketable alternative investments at the $10 billion endowment, which is managed by University of Texas Investment Management Co.
"We made a lot of commitments in 2000 and early 2001, but the venture firms have been slow to invest the money, which is good (because when they invest it going forward, valuations will be lower). And right now there aren't a lot of venture firms to commit to because there aren't a lot out in the market. They have money to invest, and the pace is slower. We're still supportive of venture; we believe in it, and we meet with venture groups. We have a few groups in due diligence, and if we're satisfied, we would commit. But we haven't found the right opportunities, since there isn't a lot fund raising right now."
Around 20% of the endowment's $3 billion in private equity commitments is in venture funds. Over the very long term, the endowment might raise that to 30% of the private equity portfolio, she said.
Ms. McMahon added the endowment has slowed its overall pace in private equity commitments for the fiscal year ending August 2003, committing only $170 million so far -about half the $375 million in private equity commitments made in fiscal 2002.
The $37 billion Washington State Board of Investments, Olympia, hasn't added any new partnerships in 18 months, said Joe Dear, executive director. Washington has around $1.2 billion in uncalled commitments and $850 million invested in venture. "None of our venture funds have come to the board raising new funds, but we expect some might come to re-up later in the year," he said.
"Now, we're more likely to add secondaries, but only with existing managers. We're not looking to invest with any new groups at this point since we already have relationships with 86 general partners, and we want to know exactly what's going on in those funds."
The $40 billion State of Michigan Department of Treasury, Lansing, is taking a different tack and targeting investments in Michigan. "We're still looking for return primarily, but we're being more selective and want to lock in top-quartile managers," said state Treasurer Jay B. Rising said. "And now we are giving a priority to partners who will make a commitment to evaluating and investing in Michigan companies."
The Michigan pension funds still have $1.5 billion to $2 billion in uncalled capital earmarked for special situation and venture investments.
Meanwhile, Oregon state Treasurer Randolph Edwards will recommend the $33 billion Oregon Public Employees' Retirement Fund, Salem, increase its venture capital allocation to as much as $350 million. The system's current allocation is around $140 million.
"We're underweighted in venture cap, even though we're at the top of our private equity allocation," which is 13% of total assets, Mr. Edwards said. "The bias has been toward buyouts, and this is probably a good time to look at increasing venture cap."