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Venture investing cools – First hint of trouble

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University endowments and other institutions are starting to trim their investments in venture-capital funds, The Wall Street Journal reported July 3.

After enjoying triple-digit returns for a year or two, pension funds and other big investments have seen their venture investments hit their allowable limits, the Journal says.

Investment managers are reluctant to ask their trustees for permission to increase the amounts put into venture-capital funds.

Macalester College in St. Paul, Minn., for example, has not invested in venture capital in a year.

Even with no new investments, gains in the school’s venture holdings have pushed investments in that asset class to the 8 percent limit on venture investment.

“We’re pretty adamant about sticking to those allocation limits,” Craig Aase, the treasurer who manages the school’s $520 million endowment, told the Journal.

If returns from venture capital push those assets to more than 8 percent of his portfolio, he says, he’s have to sell some.

Mario Giannini, president of Hamilton Lane Advisors LLC, which advises institutions on investing in private equity, told the journals that investors are cutting back the number of funds in which they invest.

First hit will be the weakest of newest funds, venture capitalists with short track records or below-average returns, the Journal says, with top funds continuing to be able to raise cash at the expense of weaker ones.

“It’s going to become a bit Darwinian here, where only the strongest flourish,” Donna Smolens, a general partner at Technology Crossover Ventures, a Silicon Valley venture-capital firm, told the Journal.

For two or three years, many big pension funds have doubled the share of their assets in venture capital, the Journal says. And as returns have soared while stock markets have stalled, venture investments have grown in relative importance in pension funds’ portfolios.

“Lots of people are bumping up against their target allocations, and mnost are deciding that those allocations are appropriate,” the manager of a large university endowment told the Journal. “However spectacular the returns, do you really want 20 percent of your funds in illiquid ventures? It’s crazy.”

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