Investors • 09 March 2022
What is happening? Over the past 7 years, an explosive demand for capital from early-stage startups has driven investors to a new asset class called micro-VC — a specialty venture capital firm with USD25-100 million in assets under management (AUM), compared to the usual USD100-200 million. Are investors getting hungrier? The
What is happening?
Over the past 7 years, an explosive demand for capital from early-stage startups has driven investors to a new asset class called micro-VC — a specialty venture capital firm with USD25-100 million in assets under management (AUM), compared to the usual USD100-200 million.
Are investors getting hungrier?
The number of households with more than USD1 million to invest is growing fast around the world. It exceeded 20 million households in 2021 and controls over USD80 trillion of assets, according to Cap Gemini World Wealth Report 2021. These investors have long sought direct access to alternative investments, such as private equity and venture capital funds, to diversify their portfolios and realize the potential for higher returns.
The limitations faced in PE?
Venture capital (VC) funds have long been associated as a long-term investment with huge risks and returns, and not readily available for individual investors. With investment commitments starting from USD1 million, investing in private equity is typically geared towards institutional investors or family offices. Individual investors continue to be significantly under-exposed to this asset class, due to regulatory restrictions as well.
A new evolution of asset class — Micro-VCs
Now, asset managers are challenged to think outside of the box — away from the traditional asset classes of stocks and bonds, and diversify into deeper areas of private equity (PE).
Micro-VCs are launching microfunds to offer individual investors access to institutional quality secondaries co-investment opportunities, and the value add of private equity, without the need for high investment commitments. Thus, a clear signal for how important alternatives are for investors.
Why are they so desirable?
Diversification - One major advantage when investing in funds is diversification. Funds balance risks by investing in a broad array of companies across multiple market sectors or geographic regions, lowering the risk associated with a single investment, should it go poorly.
- Highly experienced management team - The same way a VC invests in an experienced and qualified management team, this is a strong factor for investors to invest in funds. Investors benefit from competent fund managers with diverse backgrounds and expertise that brings value to the company.
- Access to a wider pool of high-quality deal flow - Microfunds provide investors access into highly competitive rounds of venture-backed companies led by top-tier VCs, something individual investors might find difficult to access on their own.
- Assets are typically actively managed by in-house teams - Micro-VC’s investments are typically actively managed by their in-house teams, comprising qualified people with incentives entirely aligned with making the investment a success, which help to build value and returns. Investors could also benefit from micro-VCs rigorous due diligence process.
- Lower investment fees - Investing in a microfund enables investors to participate in potentially highly profitable investments without having to pay additional filing fees, which may be incurred by investing through a feeder fund structure where the investors are required to be registered as Limited Partners.
- Stronger deal terms - The collective deal size provides micro-funds leverage to secure better deal terms than from an individual investor standpoint
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