Archive for August, 2006
I wrote last week about the issues of fees in the investment industry. Now it appears that state governments are so enamored with the venture industry that they are investing on margin. According to VentureWire:
Deutsche Bank AG is emerging as a leading source of capital for private equity funds of funds sponsored by state governments.
In the latest instance, Michigan Gov. Jennifer Granholm announced this week that Deutsche Bank had ponied up $200 million to finance the state’s Venture Michigan Fund, which is a fund of funds earmarked for regional venture capital funds.
The Venture Michigan Fund is the second state-sponsored fund of funds that Deutsche Bank has financed. Deutsche also supplied Utah with $100 million for its Utah Fund of Funds in March. That vehicle invests more broadly in in-state venture capital and buyout funds.
Deutsche is said to be negotiating with other states that are also in the process of setting up funds of funds, a person close to the issue said. Deutsche declined to comment.
The Venture Michigan Fund is managed by Credit Suisse’s Customized Fund Investment Group, while the Utah Fund of Funds is overseen by Ft. Washington Capital Partners.
Rather than serve as a traditional investor, Deutsche acts more like a lender to the funds of funds. Both Michigan and Utah pay interest on the value of the bank’s commitment. In the case of the Venture Michigan Fund, the state pays Deutsche more than 6.5% interest on the $200 million it is supplying. And if the fund of funds’ investments fail to generate enough profits to cover the interest payments, Deutsche receives tax vouchers for the full amount as a backstop.
This is the kind of crass stupidity from politicians that bolsters the argument for limited government.
A large amount of the money flowing into private equity and venture capital comes from pension funds. Typical venture funds charge 2.5% fees annually. The pension fund managers also charge a fee (around 0.3%) to manage the entire pension fund. Often, there is an additional layer of fees if the pension fund manager decides to access the venture capital asset class through a fund-of-funds. Fund-of-fund managers typically charge 1% for their services (picking the underlying venture funds). The total fees that an 85-year old nurse is being charged on her pension is therefore close to 4%. And this does not even take into account the 20% of any profits which are allocated to the VC’s, the 5% of profits added to the fund-of-funds manager and the bonus allocated to the pension fund manager.
All this leads me to my broader point: why are people content to give up almost 5% of their life savings annually. The long term returns on stock investing is 8-9% depending on the time frame and those returns are easily accessible to anyone through low cost (<0.2%) exchange-traded index funds. It is unlikely that venture funds will return in excess of 15% annualized IRR over the next few decades. And even if they do, all the compensation for taking on the additional risk goes to the finance industry.
There is a similar phenomenon in the public markets. Mutual fund fees are often as high as 2%. Why are people willing to pay those fees when there is an abundance of evidence that the vast majority of fund managers underperform the indices they are attempting to track?
Last night I watched one of those movies (“In Her Shoes“) that is thoroughly enjoyable while you’re watching it but you know you won’t remember it in a few months time and it will have very little impact shaping your life. Afterwards I was inwardly cursing the waste of time when a thought occurred to me: How long am I going to defer gratification until some later time in my life when I will conclude that I have earned it? And do we sometimes delay gratification because we’re not even sure exactly what it is that we enjoy doing? Because we’ve never allowed ourselves to slow down enough to explore all the fun in the world? And then before we know it, we lose the ones we love.
One Art – Elizabeth Bishop
The art of losing isn’t hard to master;
so many things seem filled with the intent
to be lost that their loss is no disaster.Lose something every day. Accept the fluster
of lost door keys, the hour badly spent.
The art of losing isn’t hard to master.Then practice losing farther, losing faster:
places, and names, and where it was you meant
to travel. None of these will bring disaster.I lost my mother’s watch. And look! my last, or
next-to-last, of three loved houses went.
The art of losing isn’t hard to master.I lost two cities, lovely ones. And, vaster,
some realms I owned, two rivers, a continent.
I miss them, but it wasn’t a disaster.–Even losing you (the joking voice, a gesture
I love) I shan’t have lied. It’s evident
the art of losing’s not too hard to master
though it may look like (Write it!) like disaster.
I love Skype and I’ve tracked the growth in online users since October 2003. I’ve noticed a disturbing trend the last few months. The number of concurrent online users peaked at around 6.5M users in May 2006. This peak usually occurs around 7am (Pacific Time). June and July had similar peaks but since then I have rarely seen numbers over 6.3M online users and never greater than the previous maximum. Is this caused by more people being on vacation during the summer? The next few months should answer that question.
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"What of the dreams that never die?"