Investments in alternative assets continue to be loud, but are producing diminishing returns increasingly
Amid announcements of record fundraisings—Sequoia Capital, the largest venture capital fund ever, raised the bulk of a $8 billion fund, while The Carlyle Group raised a $6 billion private equity fund for Asia—there is a rethinking of investing in alternative assets across the globe.
The rethinking is coming from Norway’s sovereign wealth fund, Canada’s Healthcare of Ontario Pension Plan (HOOPP), California Public Employees’ Retirement System (CalPERS), Pfizer and the Tata Trusts. They want their investing to solve real problems, locally and globally, and to be more involved in their investments—as strategic partners or as direct sponsors.
Investors worry that many hadn’t fully thought through investments in icons such as Facebook, Uber, Instagram and Baidu. And although the payoffs have been blinding, the fallouts have been just as spectacular. Investors feel that governance at many of these companies is out of control, that managers often are out of sync with social goals, employee needs and conflicting global realities.
Fund managers aren’t helping. Their portfolios increasingly are less liquid and outperformance is often being gobbled up by general partners’ fees.
The Healthcare of Ontario Pension Plan, in June, bought out TPG’s $750 million stake in Chobani, a Norwich, New York, yogurt maker founded by Hamdi Ulukaya, a Turkish-born entrepreneur. In April 2014, the private equity firm had stepped in to invest $750 million after Chobani was facing difficulties following slowing sales and product recalls. But Chobani and TPG never saw eye to eye. And soon, Chobani began to look for an investor that shared its vision and its business strategy. HOOPP was the answer. The structure is not only expected to forge a symbiotic relationship between HOOPP’s commitment to health and healthcare, and Chobani, but also provide the founder and the employees a chance to increase their equity position and their governance.
Pfizer Ventures, with $600 million from its parent company Pfizer, had recently created its own open house for a healthcare business, developing transformative medicines and technologies, following the company’s decision to invest capital and strategic resources in critical areas of unmet therapeutic needs.
CalPERS, US’ largest public pension fund, is also overhauling its private equity model in spite of the financial success it has had (10.6% annually over the past 20 years). Worried about the long-term nature of private funds, often a 10-year span, and escalating management fees (2% management fee can eat up one-fifth of a fund’s capital), CalPERS is bringing some of its private equity in-house. A new programme, called CalPERS Direct, plans to directly invest in promising companies in life sciences, healthcare and bio-technology. “These models won’t replace what we are doing, they will operate alongside them," noted Marcie Frost, CalPERS CEO.
But perhaps the greatest rethinking is coming from Norway’s sovereign trillion-dollar wealth fund. It has recognized that it cannot change the world, but can create an environment for ethical investing, one that focuses on solving problems rather than simply unicorns and moonshots. Most important, they believe in working closely with the communities they invest in.
India’s Tata Trusts, a not-for-profit, in its mission, recently announced a broad-based initiative to address the burden of cancer. The programme will build over one hundred cancer centres across India, connect them with a national command centre from where various medical services such as radiology, pathology, treatment planning, and genetic counselling can be provided remotely. The focus will be as much on screening as it would be on diagnosis and treatment. The system is intended to become financially self-sustaining in less than five years.
Ironically, only a handful of venture funds fully recognize the change. Artiman, a small Palo Alto venture fund, which has invested in areas such as healthcare, life sciences, new materials, and energy, may be an exception. Staying away from “momentum investing," the firm is focused on bringing trans-disciplinary innovation to old-world problems such as construction, diagnosing infectious diseases and water filtration. These industries don’t exactly sound glamorous, but they represent markets ranging between tens of billions to over a trillion dollars.
In designing products and services in the life sciences, most businesses start by testing and introducing their products within the US because it is still the largest and most lucrative market. Artiman companies have flipped the geography, starting first in India, China and Taiwan. One outcome: vastly reduced development costs and increased access to these new offerings. Artiman companies are aggressively seeking out woman founders, not because it is good politics, but because they bring a different “cognitive diversity" to the start-up. Most important, they are patient investors, willing to wait out years—beyond the life cycle of most traditional funds—to make sure the outcome is correct and accurate.
Investments in alternative assets continue to be loud and sexy. But increasingly, they are producing diminishing returns. And selling the alternatives to the alternatives may be a hard sell. But if it means solving problems, locally and globally, creating real jobs and wealth, and bringing about real change, it should be worth it.
Udayan Gupta is an author, educator and financial consultant based in New York. He currently teaches Venture Capital, Entrepreneurship and Small Business at Fordham University in New York.