How do you deal with the illiquid nature of these investments?
We need to generate about £10m a month to pay pensions and have about £3bn in gilts and a lot of liquid assets. Beyond that though, we like to stay fully invested for as long as possible which is why we like embedded value deals where the result will emerge in seven to 10 years’ time. This makes the VC plays we are doing interesting because you have to work out what will be trending in seven to 10 years’ time not next week. We are spending a lot of time in cyber security and Wi-Fi; in fact we closed on a deal recently where the other major co-investor was the American CIA’s venture capital fund.
Is there a governance issue when investing in smaller companies in the VC space?
We have used our private equity fund man agers, who operate to a very high standard and use both pooled and co-invest arrangements, to manage a non-discretionary portfolio for us. They assist with the due diligence, the execution and performance monitoring – they are our on the ground eyes and ears. They can also aggregate lots of small ideas because typical VC funds might be writing £8m-£10m cheques which for us does not have any impact, so we need a way of aggregating it and making the due diligence effective. Typically, we are looking at a minimum £50m allocation
but I usually like to invest more than that.
Are there any other examples of these special collaborative deals?
We are looking to joint venture with some of the sovereign wealth funds to create an accelerator fund product. A lot of large sovereign funds have a lot of money to invest and have a sophisticated screening process, but they are finding a lot of good idea areas where people only want to raise, say, $150m or $200m, so they have the problem of not being able to get enough capacity into
these vehicles. We are in early discussions with sovereign wealth funds around what we can both put into the operational structure to set up a higher level incubator vehicle. It is bringing together the people who have the money, knowledge and time with people who have the great ideas and don’t know how to bring them to market. You are getting more than a reduced rate management
fee and a share of the carried interest. It reflects something we did last year where we largely sold out of our hedge fund exposures and started buying into the equity of hedge fund managers instead.
Did high fees influence your change of tack with hedge funds?
I have not been a great fan of hedge funds over the years, largely because they were fairly mundane ideas heavily geared and quite often people who had okay investment ideas were pretty poor at treasury management – all the big blow-ups were not through lack of ideas but a lack of cash. A lot of funds have been launched over the years by people who were not even great long-only managers. There is no point being in possession of the biggest secret in the market however brilliant it is because until the rest of the market gets it they are not going to buy into it and the price is not going to move. A criticism levied at members of the wider fund management industry is that as we have moved into a lower inflation and nominal return space they have not adjusted their fee take, whether a hedge fund with carry or even basic asset management. Then there is the alignment of interests and people not really having sensible hurdle rates. I have no problem paying someone for performance, in fact I prefer to pay them for performance, but I don’t think that is how the fee model works.
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