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Alternative Market Briefing

Venture capital can be a diversifier, but many investors are still underweight

Wednesday, December 01, 2021

Bailey McCann, Opalesque New York: New research from Hardman & Co suggests that retail investors could benefit from adding venture capital to portfolios at a higher weighting than previously considered.

Venture capital is often included in an alternatives sleeve accounting for 5-20% of an investor portfolio. According to Hardman & Co, venture capital is distinct enough in its behavior as an investment and return profile that it should be considered its own asset class rather than being lumped in as part of a broader allocation to alternatives, which often includes hedge funds, real estate, private equity or private debt. An allocation to venture could also be made without the addition of any of these other asset classes.

The paper splits venture investing into two primary groups - seed stage investing and scale-up investing. Scale up investing includes most series rounds leading to either a pubic listing or sale to a non-venture buyer. Investors can expect the highest return from getting in at the seed stage, but also a higher risk of failure. Scale up companies have a lower risk of failure and a correspondingly lower rate of return on average.

The paper considers an allocation to venture capital from within a traditional 60/40 stocks and bonds portfolio. For those with a lower risk tolerance the paper considers an allocation of 5% to scale up venture and 2% to seed stage venture. Investors with the highest risk tolerance should cap their allocation to venture ......................

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