Alumni Ventures Group (VC)

[Watchmaker]

Anyone have any experience with Alumni Venture Group? They are a new-ish VC fund which takes investments from individuals rather than institutions.

I'm about as boring and predictable a Bogleheads-style investor as you'll find. Almost all of my NW is in broad, low-fee index funds. But I'm a big fan of diversification, would like to diversify into other asset classes. I've long been curious about private equity and VC, but I'm not fooling myself that I have any sort of special knowledge. That's why the approach of AVG interests me: they never lead deals, just tag along on deals of established VCs.

[seattlecyclone]

I've been on their mailing list for some time but haven't invested anything. I think it would be fun to gamble a bit of cash on startups at some point either through a fund like this or by doing some angel investing. However I believe their minimum investment is something like $50k and I'm still early enough in FIRE that I don't feel comfortable investing that much in something highly speculative and illiquid.

[Heckler]

the approach of AVG interests me: they never lead deals, just tag along on deals of established VCs.

I know nothing about VCs, but this sounds like a middleman siphoning off fees to me.

[Watchmaker]

I've been on their mailing list for some time but haven't invested anything. I think it would be fun to gamble a bit of cash on startups at some point either through a fund like this or by doing some angel investing. However I believe their minimum investment is something like $50k and I'm still early enough in FIRE that I don't feel comfortable investing that much in something highly speculative and illiquid.

I'm not that excited about gambling on individual companies, but investing in a VC fund that makes 20-30 separate deals, or AVG's "total access fund" with 200-300 deals sounds interesting to me. I'm not looking for a big payday, rather I'm looking for asset class diversification.

I know nothing about VCs, but this sounds like a middleman siphoning off fees to me.

This company's fee structure is the typical hedge fund/VC "2 and 20", so in that sense they are no worse than the industry standard, but that's a pretty awful standard (for investors... great for fund managers). That's one main thing that would stop me from investing with them.

[Michael in ABQ]

The typical VC model is that only a small percentage of investments will pay off, but they'll pay off 10-100x. Most will go to zero. If your $50k is all going into one company I would definitely avoid it.

You're taking on additional investment risk, plus liquidity risk. If this fund can't show some history of 15%+ returns it's not worth it. Stick your money in an index fund and earn ~10%. 

[MustacheAndaHalf]

Am I reading it correctly, that your investment runs for 12-15 years?

Their approach is to take 20% of your investment to pay for 10 years of management fees.  Following that, they also take 1/5th of the profits.

Let's say the S&P 500 performs +7%/year for the next 10 years, or 1.07x per year.  I think that's comparable to +11%/year before AVG fees.  They take 1/5th of the profit, so +11% becomes +8.8%.  And then 2% of your whole portfolio (108.8%), leaving you with +6.6% gain.

And Warren Buffet won his bet that the 10 year performance of the S&P 500 would beat a group of hedge funds over the same time period.  So I'm guessing the odds are low of a 2% annual fee plus 1/5th of gains coming out ahead.

[Watchmaker]

Am I reading it correctly, that your investment runs for 12-15 years?

Their approach is to take 20% of your investment to pay for 10 years of management fees.  Following that, they also take 1/5th of the profits.

Let's say the S&P 500 performs +7%/year for the next 10 years, or 1.07x per year.  I think that's comparable to +11%/year before AVG fees.  They take 1/5th of the profit, so +11% becomes +8.8%.  And then 2% of your whole portfolio (108.8%), leaving you with +6.6% gain.

And Warren Buffet won his bet that the 10 year performance of the S&P 500 would beat a group of hedge funds over the same time period.  So I'm guessing the odds are low of a 2% annual fee plus 1/5th of gains coming out ahead.

You're right, minus a few details. The investments can run for up to 12-15 years but since each fund contains 20-30 separate investments, it's likely that some of it will pay out faster than that. And the 20% share on profits only starts after they have returned 100% capital to the investors, not just the 80% they invested, which slightly reduces the overall fees, but your numbers are pretty close--I calculate that over 12 years, you'd need a 10.8% CAGR from that fund to match 7% per year from a low fee fund.

I agree that with those kinds of fees outperforming index funds is unlikely but I'm wondering whether there still could be some diversification advantage. How correlated are the VC results to passive index results?  If correlation is low, an asset class can provide a benefit even if it has lower average returns. That's why I hold a small amount of bonds, after all. I'm having trouble answering that question though, because there doesn't seem to be much data, and the data that is available doesn't seem trustworthy to me.

[Michael in ABQ]

Am I reading it correctly, that your investment runs for 12-15 years?

Their approach is to take 20% of your investment to pay for 10 years of management fees.  Following that, they also take 1/5th of the profits.

Let's say the S&P 500 performs +7%/year for the next 10 years, or 1.07x per year.  I think that's comparable to +11%/year before AVG fees.  They take 1/5th of the profit, so +11% becomes +8.8%.  And then 2% of your whole portfolio (108.8%), leaving you with +6.6% gain.

And Warren Buffet won his bet that the 10 year performance of the S&P 500 would beat a group of hedge funds over the same time period.  So I'm guessing the odds are low of a 2% annual fee plus 1/5th of gains coming out ahead.

You're right, minus a few details. The investments can run for up to 12-15 years but since each fund contains 20-30 separate investments, it's likely that some of it will pay out faster than that. And the 20% share on profits only starts after they have returned 100% capital to the investors, not just the 80% they invested, which slightly reduces the overall fees, but your numbers are pretty close--I calculate that over 12 years, you'd need a 10.8% CAGR from that fund to match 7% per year from a low fee fund.

I agree that with those kinds of fees outperforming index funds is unlikely but I'm wondering whether there still could be some diversification advantage. How correlated are the VC results to passive index results?  If correlation is low, an asset class can provide a benefit even if it has lower average returns. That's why I hold a small amount of bonds, after all. I'm having trouble answering that question though, because there doesn't seem to be much data, and the data that is available doesn't seem trustworthy to me.

Sounds like an information asymmetry that benefits the people making money off your investment.

The finance industry in general does an excellent job of extracting fees out of the movements of capital. There's a reason they measure things in basis points, or 1/100th of a percent of interest. Even extracting a single basis point off a large enough pool of money can make you very rich.

Bottom line, you will probably be much better off in the long run simply sticking with index funds.

[MustacheAndaHalf]

Am I reading it correctly, that your investment runs for 12-15 years?

Their approach is to take 20% of your investment to pay for 10 years of management fees.  Following that, they also take 1/5th of the profits.

Let's say the S&P 500 performs +7%/year for the next 10 years, or 1.07x per year.  I think that's comparable to +11%/year before AVG fees.  They take 1/5th of the profit, so +11% becomes +8.8%.  And then 2% of your whole portfolio (108.8%), leaving you with +6.6% gain.

And Warren Buffet won his bet that the 10 year performance of the S&P 500 would beat a group of hedge funds over the same time period.  So I'm guessing the odds are low of a 2% annual fee plus 1/5th of gains coming out ahead.

You're right, minus a few details. The investments can run for up to 12-15 years but since each fund contains 20-30 separate investments, it's likely that some of it will pay out faster than that. And the 20% share on profits only starts after they have returned 100% capital to the investors, not just the 80% they invested, which slightly reduces the overall fees, but your numbers are pretty close--I calculate that over 12 years, you'd need a 10.8% CAGR from that fund to match 7% per year from a low fee fund.

I agree that with those kinds of fees outperforming index funds is unlikely but I'm wondering whether there still could be some diversification advantage. How correlated are the VC results to passive index results?  If correlation is low, an asset class can provide a benefit even if it has lower average returns. That's why I hold a small amount of bonds, after all. I'm having trouble answering that question though, because there doesn't seem to be much data, and the data that is available doesn't seem trustworthy to me.

I said "They take 1/5th of the profit, so +11% becomes +8.8%", which is 20% of the profit.  The profit was +11%, so 20% of that is 2.2%, leaving 8.8%.  So I think I calculated the profit sharing correctly.

Technically, they charge 20% of initial assets for 10 years, and claim it's more convenient than collecting their 2% fee annually.  But if I multiply 0.98 to the 10th power, I get 0.817.... Meaning if they charge 2% fees per year, because each 2% is on a smaller balance, you wind up with 81.7% of your original assets.  With their "20% off the top" approach, you lose an extra 1.7% for convenience.

Yale Endowment's David Swenson talked about the value of venture capital and real estate in a portfolio.  According to him, venture capital had much higher returns - but also a much higher risk of loss.  So maybe my +11% estimate is low - the industry is a bit too opaque to know.

I would also criticize my earlier post by saying not all hedge funds invest in venture capital.  So venture capital funds might have beaten the S&P 500 over 10 years.  But with the data being so opaque, it's hard to find a trustworthy source (like Buffet's public bet).

[LWYRUP]

Most historical evidence about this has shown that unless you have multiple millions to invest the benefits (potential higher returns, diversification benefit) are not worth the costs (higher fees, and occasionally sub-optimal performance).  You need a big enough pot that you can negotiate lower fees and also hire accountants and attorneys to advocate you in a cost-effective manner.

These types of investments should be a diversifier to an otherwise broad portfolio, so maybe 10%.  So you'd really need like a $40 million portfolio, to which you decide to devote $4 million to a fund you and your advisers thoroughly vetted, for it to be rational.  Apparently the 0.1% (one in one thousand americans, so more people that you might think) have a net worth of $40 million plus, so there are a fair number of people for whom this could be a rational strategy.  I don't expect I'll ever be one of them though.

There are some people in the low millions who LOVE to put a small amount of money in these types of investments (like say $25k or $50k).  The juice is almost never worth the squeeze, so honestly I think it's really done for status / curiousity / marketing.

Less than $5-10 million, I think you can just own your own home and dump the rest in a three fund portfolio and check your balances once a year and be fine.  Once you start pushing past $10 million then maybe it's time to reassess, though lots of smart people will still say it's still not yet time to bother doing anything different. 

[NorCal]

I worked in the VC world many years ago.

Honest advice is to not get involved unless it is a world you work in professionally and can actually understand at a deep level. You would also want to have the knowledge to benchmark your fund against other funds.

Fees are incredibly high, the agreement with your fund manager is both complex and nuanced. It would be all too easy to invest in a fund that is actually run very different than what you expect.

Heck, The fund I worked at had a mandate to return all capital in 10 years. Even though this was in the initial contract, reality interceded and the fund didn’t return all initial capital for about 17 years.

If I remember correctly, there are a couple mutual funds that hold shares in pre-ipo companies. This might be a better path to research. I think Fidelity runs some of those funds.