By Greg Bassuk, Chief Executive Officer, AXS Investments
With stocks continuing to achieve all-time highs, rates still hovering around historical lows, and coronavirus variants all driving unprecedented market uncertainty, there has never been a time riper to focus on alternative sources of returns to help investors build their best portfolios.
One area of particular interest is venture capital. While financial news headlines are dominated day-to-day by the stock prices of public companies, so much of the innovation and growth driving our economy derives from privately held companies.
Institutional and high net worth investors have long recognized the significant investment attributes of the private sector and have been investing in start-ups and high growth companies prior to their initial public offerings, either directly through private offerings, or through traditional venture capital funds. In recent years, however, individuals have started to see investor-friendly products that enable them to access the very high growth potential of the Venture Capital asset class (check out our blog on this).
The activity and outlook for venture capital have been remarkable coming out of the pandemic and worthy of any investor’s attention, especially as of late. Let’s take a look.
A new report by Crunchbase shows that global venture capital funding hit $288 billion during the first six months of 2021. That record-setting figure tops the previous record of $179 billion set in the second half of 2020.
Tiger Global Management topped all managers in venture capital activity during the period. The company led or co-led 87 investments. In addition, it participated in an additional 57 investment rounds, according to the report.
Other active managers included Insight Partners (led or co-led 82 investments), Andressen Horowitz (57), and Accel (38). Accel is notable as the company has seen 10 of its investments go public since 2019.
Crunchbase also notes that 250 companies have joined its Unicorn Board since January. In addition, the number of new private companies now valued at more than $1 billion is up from the 161 new unicorns during the full year 2020.
Various research suggests that venture capital activity has increased partially from trends forged by COVID-19. Biotech firms and at-home trends, for example, have experienced a swell of investor interest. So too has cybersecurity, climate tech, healthcare and diagnostics, and personal safety equipment.
The deployment of capital is not just trend-specific. In fact, capital is flowing not only to smaller emerging companies as was the case in the old VC construct, but also to larger, more established firms that still have strong upside ahead. For example, there were roughly 40 deals per month between 2016 and 2020 in which the deals involved more than $100 million, according to CB Insights. By contrast, in 2021, the number of projects per month through mid-year with more than $100 million in funding has tripled to roughly 120.
Capital also is flowing from an increasing number of companies operating outside the traditional venture capital space. Nontraditional venture investors participated in 77% of the U.S. market’s deal value in 2020. In addition, they were beneficiaries of roughly 95% of the total exit value of deals in 2020. (Source: Pitchbook.)
With stocks and corporate valuations at their highest levels in two decades, venture capital continues to generate significant interest among institutional investors; namely, pensions, endowments and foundations. That’s no surprise given that investors generated an annualized 30% return if they joined the first round of financing, according to Pitchbook. With these types of returns and the increase of nontraditional firms like SoftBank and Tiger Global continuing to shake up private finance, we expect even more participation from both the traditional VC investors, as well as first-time VC investors, in the months ahead.
It used to be that one had to be deemed an accredited investor in order to gain access to Venture Capital investments. And, frankly, accredited investors are best able to withstand the structural limitations of the VC asset class, such as the big-time investment minimums, high management and performance fees, illiquidity and risks associated with single company or single-fund failures. However, as mentioned above, now investors can benefit from exposure to performance of the venture capital market thanks to the AXS Thomson Reuters Venture Capital Return Tracker Fund.
There are risks involved with investing, including possible loss of principal. Past performance does not guarantee future results. Diversification does not guarantee investment returns or eliminate the risk of loss.
Venture capital investments involve a greater degree of risk; as a result, the Fund's returns may experience greater volatility than the overall market. The AXS Thomson Reuters Venture Capital Return Tracker Fund does not invest in venture capital funds nor does it invest directly in companies funded by venture capital funds. The Fund seeks to generate returns that mimic the aggregate returns of U.S. venture capital-backed companies as measured by the Thomson Reuters Venture Capital Index (TRVCI). There is a risk that the Fund's return may not match or achieve a higher degree of correlation with the return of the TRVCI. Additionally, the TRVCI's return may not match or achieve a high degree of correlation with the return of the U.S. venture capital-based companies.
Investments in equity securities are subject to overall market risks. To the extent that the Fund's investments are concentrated in or significantly exposed to a particular sector, the Fund will be susceptible to loss due to adverse occurrences affecting that sector. Loss may result from the Fund's investments in derivatives. These instruments may be illiquid, difficult to value and leveraged so that small changes may produce disproportionate losses to the Fund. Over the counter derivatives, such as swaps, are also subject to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. In certain circumstances, it may be difficult for the Fund to purchase and sell particular derivative investments within a reasonable time at a fair price.