When former Treasurer Peter Costello decided to set up the Future Fund in 2004, he probably didn’t envisage it investing in a wellness business run by a Hollywood celebrity, or a viral content site originally known for cat videos.
But as it turns out, Australia’s inter-generational sovereign wealth fund today has interests in Goop, Gwyneth Paltrow’s controversial lifestyle brand that has been criticised by doctors, and BuzzFeed, the much discussed distributed media company.
Australia is betting its future on Gwyenth Paltrow’s Goop Photo: AP
It also has exposure to Pinterest, the virtual pinboard app, Snap, the company behind disappearing photo app Snapchat, and many other tech start-ups.
OK, these investments are tiny in the context of a $130 billion portfolio, and are mostly indirect, through external funds. But they are nonetheless important, forming part of the Fund’s allocation to one of the most glamorous (and misunderstood) corners of finance at the moment: venture capital.
If you didn’t know the Future Fund was dabbling in venture capital – which basically means making lots of relatively small bets on tech start-ups – don’t sweat it. Up until now, it hasn’t really talked about it. (If you did know, then you should probably get out more).
According to chief investment officer Raphael Arndt, the Future Fund has about $5 billion deployed into tech start-ups at the moment, through external venture funds and direct equity stakes. It’s one of the best performing parts of the overall portfolio, and has returned 20 per cent a year since 2008, after fees, he says.
But as Arndt recently told me, the benefits of investing in VC goes far beyond just making money.
“It does more than just make returns for us,” he said. “It gives us insight into these disruption trends that we wouldn’t otherwise know about … an insight into what’s going on in the world that people who sit in high rise office towers might not know, that is impacting the way societies and economies operate, and impacting the rest of our portfolio.”
The Future Fund was set up in 2004 to cover Australia’s unfunded public sector pension liabilities.
It’s investments are spread across a wide array of asset classes, including local and international shares, bonds issued by foreign governments and companies, property and even timberland. It also has money in buyout funds who,buy, restructure and sell old companies; and in venture capital funds, who try to unearth new ones.
Unless you are extremely wealthy, you shouldn’t be putting money into tech start-ups, which mostly fail. For an entity like the Future Fund, it makes perfect sense, but it’s also not easy.
“It is certainly risky,” says Arndt.
Even the best VC managers expect most of the bets they make to fail. In any given venture portfolio, a handful of spectacular hits generate all of the returns.
The Future Fund has tipped significant sums into funds run by New Enterprise Associates (which in turn invested in Goop and BuzzFeed). It also has money with Bessemer Venture Partners (invested in Pinterest) and Lightspeed Venture Partners (an early backer of Snapchat).
Arndt says venture capital appeals to the Future Fund because it is not correlated to its other investments. So when prices of listed shares or property decline, venture doesn’t necessarily fall as well.
Having some VC exposure also helps Arndt and his team understand potential emerging threats to other parts of the Future Fund portfolio.
Australia has historically not had much of a local venture capital industry. It’s arguably one of the reasons our corporate landscape remains dominated by old companies such as the Commonwealth Bank and BHP. By contrast, tech giants that increasingly dominate the US stockmarket (think Apple, Microsoft, Google, Facebook, Amazon) all had early backing from VC.
Yet, over the past two years the local VC industry awakened from its slumber, with a string of sizeable new funds established. The Future Fund has not put any money into any local funds yet, but Arndt hints that might happen down the line. “The Future Fund should invest in the best opportunities from around the world. I wouldn’t exclude Australia from that at all,” he says. “We have seen a resurgence for the asset class [in Australia] that looks quite promising.”
The Future Fund has been reducing risk elsewhere in its portfolio. But Arndt isn’t concerned that a flood of money into VC is creating a bubble among start-ups.
“We are riding a very multifaceted innovation wave” he says. “We don’t see any shortage of opportunities to invest in right now.”