The Business of Venture Capital, 3rd Edition

8LP Universe

The universe of limited partners (LPs) includes a range of institutional investors such as foundations, university endowments, pension funds, fund of funds, family offices, and sovereign wealth funds. Each institution has its own DNA. Each institutional class has its own framework and investment criteria. Each institution has different sources of capital, investment criteria, constraints, and return expectations. To achieve their target returns, institutions have to constantly juggle with different types of assets.

The four major asset classes competing for investor capital are stocks (public equities), bonds (sources of fixed income), alternative assets (private equity, venture capital, hedge funds, real estate), and the safest class: cash. Based on global economic trends and risk–return potential, investors establish strategies to deploy optimum allocation of capital in each of these asset classes.

Asset allocation, a prudent method to manage risk and returns, is driven by each investor's appetite for risk, rewards, and liquidity. Consider Exhibit 8.1.

Venture capital is a sub-asset class of private equity and falls under the alternative investment asset class, and for most LPs, it is a smaller fraction of the overall portfolio. Typical LPs in any VC fund include a mix of LPs, as seen in Exhibit 8.2.

Alternative assets include a growing array of options, are listed in Exhibit 8.3.

Certain types of alternative assets, such as private equity/venture capital, are ...