4 ms·

Pension funds and similar investment vehicles put a tiny percentage of their money into VC funds. Those losses shouldn't affect the individuals much.

dogma1138 12y ago
http://www.bloomberg.com/bw/articles/2014-09-23/are-public-pensions-inflating-a-venture-capital-bubble http://www.bloomberg.com/bw/articles/2014-09-23/are-public-p... Insurance companies and pension funds make up 50% and upwards of an average VC. The rest of the money also comes from sources which directly affect you such as local government, banks, and other "public" institutions. "Rich individuals" on the other hand do make up only a fraction of the VC source funding with less than 2% on average. And while it's true that it doesn't represent the portion of the money a pension fund has invested in a specific VC. If you look at the breakout of your pension fund you'll find just how ridiculously high that percentage actually is. And BTW an insurance company or a pension fund that gets hit with even 5-10% loss means that tons of people lose coverage, premiums sky rocket and you end up losing more money that you could invest yourself otherwise.
- sharkweek 12y ago
  CalPERs only allocates ~1% to VC (still billions). VC is actually a pretty soft risk in the big picture of their private allocations: https://www.calpers.ca.gov/eip-docs/investments/policies/inv-asset-classes/pe/pe-prog.pdf https://www.calpers.ca.gov/eip-docs/investments/policies/inv...
  - dogma1138 12y ago
    It's their target not sure if those are actually the figures because in 2014 they were to scale from 7 to 1% in 5 years. There's info on that in the article. It was also not because of risk but because of low returns. Besides public funds you also have corporate and private funds which also risk a huge portion of their money in risky capital not only VC.
- sixQuarks 12y ago
  You're using statistics in a misleading way. Total VC investments in 2014: $40 billion 300 largest pension funds control: $12.7 trillion Total annual VC investment is 0.003% of pension fund value. That doesn't even include insurance companies and other smaller pension funds. It doesn't mean anything when you say half of VC funds come from pension funds. It's still a miniscule amount when looking at the total value of pension funds.
- rlucas 12y ago
  1. dogma1138, your own cite doesn't support your "insurance and pension is > 50%" figure. The Bloomberg link shows a 2014 graphic where: Public pension: 20% Corporate pension: 7% Insurance companies: 7% Union pension funds: 2% --- "Insurance and pension" total: 36% (This is the fraction of the VC's fund that is committed by those types of institutions, NOT how much of those institutions' portfolios are in VC; see below for that.) 1.5. Elsewhere in this thread, dogma1138 suggests that the Bloomberg mention of CALPERS trimming their VC allocation is "to 1 percent, from 7 percent..." What is left off is the crucial kicker: "...of its private equity portfolio." Meaning that even CALPERS is allocating only 0.5% or so to ALL its venture capital managers. 2. The fraction of an institutional portfolio that goes to any one VC fund is usually well under 1%. How it actually works (foundation / endowment model): - Estimate asset class returns, volatilities, and covariances. This is done with historical analysis and some forward-looking hand-wave mumbo-jumbo. - Chart out the "efficient frontier" of expected return per unit "risk" (volatility of return) across several model portfolios (each of which is a set of % allocations to the various asset classes). This makes a nice hyperbola that looks like a "C" and you pick one of the ones in the top left, meaning, more return and less risk. - That asset allocation will almost certainly look something like: Public Equity: most Bonds: second-most Hedge Funds: small Private Equity: small "Alternatives" in vogue at the time (timber, gold, real estate, rice paddies, comic book royalties, whatever): small (Where "small" usually means < 15%) - Then, within the "Private Equity" bucket, you divvy that up and do a similar exercise: Large Buyout: most Middle-Market: recently more fashionable Venture Capital: small (Here, the VC part of private equity is likely 0-25%, unlikely to be a big part of the PE bucket.) - Then, within each of those buckets, you pick a variety of "managers." Probably at least 3-5 in the VC bucket. - Then, with each VC "manager" (VC firm) you allocate your commitments such that you can have some continuity of investment across the serial funds of that firm. (Note: if you don't have the size or sophistication to manage managers, you might just buy a "fund of funds" to achieve diversification within the VC sub-allocation of your PE allocation). If an institution has 10% allocated to PE, they might have 2% allocated to VC, and of that, 0.5% might be allocated to a particular manager (firm), and it might well be put no more than 0.25% into a particular fund. 2.5 Insurers and pensions work differently from the above (endowment/foundation model) in some ways, the same in other ways. Crucially they both have to manage the expected liabilities of near term payouts -- but they don't do that with private equity / venture investments, they do it with bonds. See "immunization." They do, however, try to generate a "total return" on the surplus that is not expected to be used near term. Also I'm leaving out minimum 5% spend, etc., I know. 3. It is totally rational to put a small but meaningful sliver of your large portfolio into venture capital, especially and crucially at a time when entire industries (e.g. taxicab, booksellers, maybe internal combustion cars??) can get decimated by technology disruption within a decade. If nothing else, it's like buying a cheap put against the old-line stocks in your portfolio. 4. Yes, VC has its issues but dogma1138 is not pointing out any of them. So, I'm sorry, but you're completely out to lunch if you think a VC fund or private equity fund is going to cause an insurer or pension "even 5-10% loss [such that] tons of people lose coverage, premiums sky rocket," etc.

dogma1138 12y ago

http://www.bloomberg.com/bw/articles/2014-09-23/are-public-pensions-inflating-a-venture-capital-bubble http://www.bloomberg.com/bw/articles/2014-09-23/are-public-p... Insurance companies and pension funds make up 50% and upwards of an average VC. The rest of the money also comes from sources which directly affect you such as local government, banks, and other "public" institutions. "Rich individuals" on the other hand do make up only a fraction of the VC source funding with less than 2% on average. And while it's true that it doesn't represent the portion of the money a pension fund has invested in a specific VC. If you look at the breakout of your pension fund you'll find just how ridiculously high that percentage actually is. And BTW an insurance company or a pension fund that gets hit with even 5-10% loss means that tons of people lose coverage, premiums sky rocket and you end up losing more money that you could invest yourself otherwise.

sharkweek 12y ago
CalPERs only allocates ~1% to VC (still billions). VC is actually a pretty soft risk in the big picture of their private allocations: https://www.calpers.ca.gov/eip-docs/investments/policies/inv-asset-classes/pe/pe-prog.pdf https://www.calpers.ca.gov/eip-docs/investments/policies/inv...
- dogma1138 12y ago
  It's their target not sure if those are actually the figures because in 2014 they were to scale from 7 to 1% in 5 years. There's info on that in the article. It was also not because of risk but because of low returns. Besides public funds you also have corporate and private funds which also risk a huge portion of their money in risky capital not only VC.
sixQuarks 12y ago
You're using statistics in a misleading way. Total VC investments in 2014: $40 billion 300 largest pension funds control: $12.7 trillion Total annual VC investment is 0.003% of pension fund value. That doesn't even include insurance companies and other smaller pension funds. It doesn't mean anything when you say half of VC funds come from pension funds. It's still a miniscule amount when looking at the total value of pension funds.
rlucas 12y ago
1. dogma1138, your own cite doesn't support your "insurance and pension is > 50%" figure. The Bloomberg link shows a 2014 graphic where: Public pension: 20% Corporate pension: 7% Insurance companies: 7% Union pension funds: 2% --- "Insurance and pension" total: 36% (This is the fraction of the VC's fund that is committed by those types of institutions, NOT how much of those institutions' portfolios are in VC; see below for that.) 1.5. Elsewhere in this thread, dogma1138 suggests that the Bloomberg mention of CALPERS trimming their VC allocation is "to 1 percent, from 7 percent..." What is left off is the crucial kicker: "...of its private equity portfolio." Meaning that even CALPERS is allocating only 0.5% or so to ALL its venture capital managers. 2. The fraction of an institutional portfolio that goes to any one VC fund is usually well under 1%. How it actually works (foundation / endowment model): - Estimate asset class returns, volatilities, and covariances. This is done with historical analysis and some forward-looking hand-wave mumbo-jumbo. - Chart out the "efficient frontier" of expected return per unit "risk" (volatility of return) across several model portfolios (each of which is a set of % allocations to the various asset classes). This makes a nice hyperbola that looks like a "C" and you pick one of the ones in the top left, meaning, more return and less risk. - That asset allocation will almost certainly look something like: Public Equity: most Bonds: second-most Hedge Funds: small Private Equity: small "Alternatives" in vogue at the time (timber, gold, real estate, rice paddies, comic book royalties, whatever): small (Where "small" usually means < 15%) - Then, within the "Private Equity" bucket, you divvy that up and do a similar exercise: Large Buyout: most Middle-Market: recently more fashionable Venture Capital: small (Here, the VC part of private equity is likely 0-25%, unlikely to be a big part of the PE bucket.) - Then, within each of those buckets, you pick a variety of "managers." Probably at least 3-5 in the VC bucket. - Then, with each VC "manager" (VC firm) you allocate your commitments such that you can have some continuity of investment across the serial funds of that firm. (Note: if you don't have the size or sophistication to manage managers, you might just buy a "fund of funds" to achieve diversification within the VC sub-allocation of your PE allocation). If an institution has 10% allocated to PE, they might have 2% allocated to VC, and of that, 0.5% might be allocated to a particular manager (firm), and it might well be put no more than 0.25% into a particular fund. 2.5 Insurers and pensions work differently from the above (endowment/foundation model) in some ways, the same in other ways. Crucially they both have to manage the expected liabilities of near term payouts -- but they don't do that with private equity / venture investments, they do it with bonds. See "immunization." They do, however, try to generate a "total return" on the surplus that is not expected to be used near term. Also I'm leaving out minimum 5% spend, etc., I know. 3. It is totally rational to put a small but meaningful sliver of your large portfolio into venture capital, especially and crucially at a time when entire industries (e.g. taxicab, booksellers, maybe internal combustion cars??) can get decimated by technology disruption within a decade. If nothing else, it's like buying a cheap put against the old-line stocks in your portfolio. 4. Yes, VC has its issues but dogma1138 is not pointing out any of them. So, I'm sorry, but you're completely out to lunch if you think a VC fund or private equity fund is going to cause an insurer or pension "even 5-10% loss [such that] tons of people lose coverage, premiums sky rocket," etc.