Taking a Long-Term Perspective in Today’s Gloomy Market
Today’s market isn’t fun. As a retiree living on assets, I don’t see many safe investment ports. World capital markets are panicking over China. Publicly traded stocks look overpriced and awfully volatile. High quality bond rates are still infinitesimal. High yield bonds are getting hammered. It’s really tough to make any short-term returns. Thank heavens I’m not in Germany, where you have to PAY a bank to hold your cash!
Focusing on the long-term, hoping for some growth to carry us through our 80’s and into our 90’s and leave a little over for our kids and some deserving charities. I’ve decided to invest a modest share of our assets in high-quality, early-stage venture capital.
A few years ago I would have thought about different options, but those don’t look too good now.
- I already mentioned high yield bonds, but their values are sinking.
- MLP’s used to be good, but plummeting oil prices have brought down their values, and who knows how long those oil prices will remain depressed?
- Private equity had been the place where smart money looked for more attractive and reliable returns. Unfortunately, though, too much smart money went there, chasing too few assets, so returns on private equity funds have been declining for more than a decade relative to the S&P 500, according to a recent Wall Street Journal Report. According to that report, while PE funds that started in 2003 generated returns beating the S&P 500 by a 1.4:1 margin over the life of those funds, the ratio of returns generated by PE funds that started in 2010 relative to the S&P 500 is just 0.9:1. Not good.
- Over the past few years, smart money has chased much-touted, late-stage private investment opportunities like Uber and Airbnb, to name just a couple. There are now more than 140 unicorns — privately owned startups valued at $1 billion+. While many are great businesses, their valuations look awfully high to my liking. For example, looking just at Uber and Airbnb, any unfortunate legal or regulatory rulings forcing them to abide by more of the rules constraining more traditional transportation and lodging competitors could send their valuations tumbling. Too many of the unicorns may still be private because they don’t see an IPO way out. Two of the unicorns that did go public in 2015, Box and Square, both sold their IPO shares at prices below their 2014 private valuations. No wonder there isn’t a big rush to the IPO market.
That brings me back to high-quality, early-stage venture capital. I must admit, until 2014 I was not at all into venture capital. Then, fortunately, I heard from one of my Harvard Business School classmates (from the class of 1973 . . . ouch!), Len Batterson. I did a little research homework about his career, and that brought me into the world of venture capital.
I learned about the remarkable track record that Batterson, who has been devoted to early stage venture capital for over 30 years, has amassed. His success rate – i.e. ventures in which he invested that had a positive return – was around 40%, an incredible success rate for early stage venture capital. Over his 30+ years, his funds have averaged an annual return of approximately 29%. And that was before his latest success, the acquisition of Cleversafe by IBM in November, which undoubtedly drove that return rate even higher. His poorest performing fund, which ran from 1989 through 2000, returned an average annual return of about 13%. That’s remarkably consistency.
So, with a mother still alive at 93 and my wife’s parents still active at 90, I’m committed to Len’s investment acumen to help me have the funds I need when I get to those ages!