Like many businesses these days, university endowments and state pension funds are stretched thin, short on staff and more in need than ever of good research to guide their investing.
A venture capitalist has started a new fund of funds to help these institutional investors — known in the industry as limited partners — to outsource their investing in venture capital and other types of funds.
The formation of the new fund, called Cendana Capital, was announced Monday by Michael Kim, a founder of the venture capital firm Rustic Canyon Partners. For the past few years, he has also been chairman of the investment committee of a $13 billion San Francisco pension fund, so he knows first-hand the challenges of investing in this economy.
"Public funds are in trouble right now because they're not generating the returns and they have a legal obligation to pay the benefits for their employees," Mr. Kim said.
As The Times has written previously, many people in the venture capital industry are calling for a back-to-basics approach in which small funds of only a couple hundred million dollars apiece make small investments in very early-stage companies. Several firms, including Union Square Ventures,Foundry Group and First Round Capital, are doing this.
The problem is that public pension funds have huge pots of money that they need to invest and fewer analysts than ever to research these investments. As a result, they cannot invest $20 million in several small venture funds. Instead, they need to invest $100 million in one big fund.
When Foundry Group was raising its most recent fund of $225 million in 2007, for instance, one state fund wanted to invest $100 million. Foundry had to reject the money because it did not want to accept more than $40 million from any investor in order to keep the fund small, said Jason Mendelson, a managing director of the firm.
That is one of the problems that Mr. Kim aims to solve. "As public funds seek better returns, but don't have the staff or notion of how to build an alternative investment program, a fund of funds is a good way to enter the market," he said.
Cendana will invest the limited partners' money in these types of small funds. It will also invest in other types of funds, including distressed debt and buyout funds, particularly those that are smaller and focusing on unusual areas, like family-owned companies in the Southwest. That variety is important, Mr. Kim said, because investing is cyclical, with certain types of funds performing better in some years than others.
Right now, he said, distressed debt is more attractive than venture capital, which has recently had lackluster returns. "Part of the reason the V.C. model is broken is the returns haven't been there but funds have gotten larger and larger," he said.
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- Best, Tan Yinglan
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