Venture capital: The choice of sophisticated investors

When private investors assess their own financial portfolios, it’s common to ask what more sophisticated investors do with their money. For those who don’t have financial advisors, it’s a sensible approach – find out what others are doing and copy it.

Even if you do have an advisor, many advisors (including reputable wealth managers and private banks) will not even offer venture capital.Very few understand it well enough to advise on it, and even fewer are able to gain access to the best funds.

What is a family office?

With that in mind, what do we actually know about what the most sophisticated investors choose to invest in? Let’s look at what large family offices do. Family offices are what high net worth individuals use to manage and deploy their wealth. Typically, they will have more choice and freedom where to invest (due to fewer restrictions, and an ability to write larger cheques), and therefore family offices can prove a useful guide on what’s possible in a truly sophisticated diverse investment portfolio.

What do they invest in?

According to First Republic Bank, 87% of Family Offices invest in venture capital funds in some capacity. Clearly, the vast majority of Family Offices have identified venture capital as something that should be a focus for high yield investments. This is not surprising, given venture capital has outperformed most major asset classes over the last 15-20 years.

How much do they invest in venture capital?

According to research by Silicon Valley Bank, the average Family Office allocates 13-15% of their portfolio to venture capital. This number is higher in the US than in the rest of the world, and family offices surveyed expected their VC allocation to increase in 2022 vs. 2021.

Furthermore, the research shows that larger family offices are more likely to allocate more of their portfolio to venture capital. With family offices, size typically correlates with sophistication, as offices can allocate more resource (and specialisation) to each asset class. These offices also have more choice, and it is therefore telling that they are investing even more in venture capital, even with all that choice.

What does this mean for me?

Looking at the behaviour of some of the most sophisticated investors, who have almost total freedom about where they invest, we can see that the vast majority (87%) of these are investing in venture capital funds, and allocating on average 13-15% of their portfolios to venture capital.

Given top-tier venture capital funds have been inaccessible for so long, many private investors have no allocation to venture capital, or private markets at all. These people have not been exposed to the returns that venture capital has generated over the past couple of decades.

Most people are very heavily allocated to public markets (pension, ISA, stocks & shares) and real estate (primary residence). At last, top-tier venture capital funds are a viable option for sophisticated investors looking to diversify their portfolios and access these returns.

To learn more about venture capital, and what to look for when assessing venture capital funds, visit our blog library.
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