When a startup raises a round of funding, the news typically includes a list of venture capital firms and angel investors that participated. But when a private equity or venture capital firm is raising money for its own fund, the process is much more opaque. Thus it often goes unmentioned that VCs count state-run common retirement funds among their limited partners.
To remind everyone of that fact, State Comptroller Tom DiNapoli, who manages the New York State Common Retirement Fund, dropped by the offices of two local startups yesterday afternoon: Movable Ink, which lets users serve up dynamic live content in their email, and Truveris, a software company that helps customers with pharmacy costs. We’re guessing his motivation for the tour went a little something like: Why should El Bloombito get all the credit?
Both startups were funded by the New York State Common Retirement Fund (NYSCRF), the third largest pension fund in the country, through its investment in Tribeca Venture Partners. Back in 2000, NYSCRF started an in-state program to support local private equity and venture capital funds. But Mr. DiNapoli has more than doubled the amount committed to that program, up to $987 million, since taking office in 2007.
The program has already invested $608 million in 208 companies, including 139 in New York City. Last year, Mr. DiNapoli added an additional $10 million exclusively to target early-stage and seed investment opportunities.
“If you take any of the venture capital funds in New York,” Brian Hirsch, cofounder of Tribeca Venture Partners told Betabeat by phone, “Union Square, Greycroft, RRE, FirstMark, all of our peers here in New York–when we raise a fund every three to five years we go out and raise that capital from institutions, primarily, and those institutions include public pension funds, foundations endowments, family offices, and corporate pension funds. Those are typically the sources of our capital. So our fund is made up of all of those things and Union Square Ventures, Fred Wilson’s fund, is made up of the same thing.”
Mr. DiNapoli’s office wouldn’t name all of the venture funds the in-state program invests in, but the list also includes Contour Venture Partners. The program is currently working with seven different fund managers as well. “No one talks about it,” said Mr. Hirsch. “Everyone talks about the entrepreneurs, everyone talk about the VCs. No one talks about where we get our money from.”
Those who argue that “no regular folks will be harmed in the making of this bubble” also don’t bring up the notion of pension funds as LPs. Perhaps because it makes people uncomfortable to think that that a VC’s ability to pick the next Instagram could affect public workers’s retirement. The New York Times, for example, recently reported that pension funds have turned to riskier private equity, real estate, and hedge funds in search of better returns than the bond or stock market can offer. The paper also noted that funds with over a third of their money in those riskier categories got lower returns, but paid significantly more in fees for the privilege.
That doesn’t describe NYSCRF, which only allocated a small portion of its $140 billion fund to the program. Mr. DiNapoli also says the program has an internal rate of return of more than 30 percent on exited investments–with $322.1 million returned to the state pension fund on $206.2 million invested. Of course that’s for the 75 companies that have had an exit.
But it’s an important part of diversifying their portfolios, said Mr. Hirsch. “Most pension funds are investors in almost every asset class. Venture capital for sure is on the riskier part of the curve, so as a percentage of the assets of a large public pension fund, it’s very, very small. But you don’t need to invest a lot of dollars in this asset class to make a big impact.”
Mr. Hirsch estimated that funds like NYSCRF and CalPERS (California Public Employees’ Retirement System) contribute roughly $6 billion to $7 billion into venture capital each year. “This is the retirement benefits for all the public employees of the state and it needs to get funded,” he said, which is why, “most of those assets are in bonds or public equities or other instruments that have a very low-risk profile. But you always want to put some portion of your capital into alternative investment, of which venture capital is a part of that, in order to boost the overall return of the fund.”
For Mr. DiNapoli and NYSCRF, the in-state program also has the benefit of supporting the technology industry in New York. “When we went out to raise $100 million for our fund in 2006, not everyone was a big believer in New York state,” said Mr. Hirsch. “As a matter of fact, most of the limited partners we talked to thought it was ridiculous that you can only really build great entrepreneurial companies in Silicon Valley and Boston.” But the in-state program decided to commit “a fairly large” amount of capital, which enabled his firm to attract other LPs, he added. “It’s enabled us to have a $100 million fund instead of a $50 or $60 million fund. And then that flows down to the startups as well.”