Thinking About Thinking

The Money Behind The Money

Posted in Growth Equity, Venture Capital by larrycheng on February 25, 2010

Where does the money come from that private equity (venture capital, growth equity and buyout) firms invest?  It might indirectly come from you.  Key constituents include the likes of government employees, employees of large corporations, trade organizations (e.g. teachers) and wealthy families.  Here’s the quick synopsis:

Wealthy Families / Foundations. The original investors in venture capital firms were wealthy families.  The Phipps family was behind Bessemer.  The Rockefeller family was behind Venrock.  These wealthy families often invest out of vehicles like family offices or foundations.  From those roots, many wealthy families have played impactful roles in backing some of the best names in private equity.  As the asset class has became more known and attractive, the sources of capital grew to include more institutional sources.  But, behind every institution are regular people.

Endowments. One of the most aggressive investors in venture capital has historically been school endowments.  When you make that annual class gift to your college, if you designate it for the endowment, some of your gift just might be put into various venture capital and buyout firms.  Typically, universities are charged to protect your endowment gift, so they invest it, and use the returns generated from the investment to fund various school initiatives.  Major universities like Harvard, Yale, Stanford, MIT, etc. have been big proponents of investing some of that endowment principal into private equity firms.

Pension Funds. Another prominent investor in venture capital has been corporate and public pension plans.  Pension plans (of the defined benefit variety) are just another type of retirement plan used by state governments, labor/trade unions, and large corporations.  As you work at a company or state government and thereby accrue pension benefits, the company or organization funds a pension account based on actuarial models tied to its potential pension payout obligations.  A portion of these funds are often allocated to the private equity asset class.  Major states investing in this asset class include New York, New Jersey, California, Oregon, etc.  Major corporations like AT&T, General Motors, etc. have also been active investors.

Fund of Funds. Many foundations, endowments, and pension funds lack the capacity or resources to evaluate and monitor different private equity firms.  Hence, the fund of funds industry has sprung up to pool capital from these sources into funds and then invest on their behalf.  Unlike the other sources of capital, fund of funds have to raise their capital from third party sources, just like the firms that they invest in.

So, if you follow the money through, your child’s college financial aid package or your pension plan – might be tied to a couple engineers working on some project in Silicon Valley or tied to the big buyout you read about in the Wall Street Journal.

The Chapter In The Bible That Appears Twice

Posted in Uncategorized by larrycheng on February 4, 2010

This qualifies in the camp of – you learn something new every day.  I learned yesterday that there are two chapters in the Bible that are nearly identical.  Not sure if this is common knowledge, but it was news to me.  It’s Psalm 14 and 53.  Here they are in the NIV version:

Psalm 14

 1 The fool says in his heart,
       “There is no God.”
       They are corrupt, their deeds are vile;
       there is no one who does good.

 2 The LORD looks down from heaven
       on the sons of men
       to see if there are any who understand,
       any who seek God.

 3 All have turned aside,
       they have together become corrupt;
       there is no one who does good,
       not even one.

 4 Will evildoers never learn—
       those who devour my people as men eat bread
       and who do not call on the LORD?

 5 There they are, overwhelmed with dread,
       for God is present in the company of the righteous.

 6 You evildoers frustrate the plans of the poor,
       but the LORD is their refuge.

 7 Oh, that salvation for Israel would come out of Zion!
       When the LORD restores the fortunes of his people,
       let Jacob rejoice and Israel be glad!

Psalm 53

 1 The fool says in his heart,
       “There is no God.”
       They are corrupt, and their ways are vile;
       there is no one who does good.

 2 God looks down from heaven
       on the sons of men
       to see if there are any who understand,
       any who seek God.

 3 Everyone has turned away,
       they have together become corrupt;
       there is no one who does good,
       not even one.

 4 Will the evildoers never learn—
       those who devour my people as men eat bread
       and who do not call on God?

 5 There they were, overwhelmed with dread,
       where there was nothing to dread.
       God scattered the bones of those who attacked you;
       you put them to shame, for God despised them.

 6 Oh, that salvation for Israel would come out of Zion!
       When God restores the fortunes of his people,
       let Jacob rejoice and Israel be glad!

Follow

Get every new post delivered to your Inbox.

Join 90 other followers