Why Now Is the Time to Diversify Your Portfolio: Insights from Alumni Ventures
MANCHESTER, NH / ACCESSWIRE / January 11, 2023 / A “correction in public tech stocks, rampant inflation, recession threats, and geopolitical turmoil have created an unsettled market.” This is according to Alumni Ventures, one of the most active venture capital firms in the world.
As the U.S. faces continual economic turbulence, risk mitigation becomes a necessity while also providing opportunities for investments in new areas. With diversification becoming increasingly important for investors, there is space to shift focus away from publicly traded stocks. Startups are staying private longer, and those who explore this asset class can take advantage of the value creation these fledgling companies provide.
Expanding to private investment asset classes can offer a number of benefits to investors, including adding that desired diversity to a portfolio. They can also lead to increased returns over the long term as private investments, such as private equity and venture capital, have tended to outperform the public markets. Over a 25-year period, according to Cambridge Associates, the average annual return on U.S. venture capital investments was 32.4%, while the average annual return on the S&P 500 was 9.5%.
Research by Cambridge Associates also indicated that over a 10-year period, investors who allocate 15% or more of their portfolios to venture capital investments see a median annualized return 300 bps (basis points) higher than investors who allocate less than 5% of capital to venture capital. Over the same period, institutions with a private investment allocation of 30% or more saw a median return 200 basis points higher than the median return of institutions with an allocation of 10% or less. Private equity has been shown to provide a balance to a portfolio of stocks and bonds, as it is only loosely correlated with the market, helping to mitigate risk across the board.
According to Preqin, private capital investment is expected to double by 2027, driven by retail investor interest in alternatives. Venture capital is forecast to be the fastest-growing alternative asset class, with a 19.1% annual growth rate from 2021 to 2027, followed by infrastructure and private debt. Despite a challenging macroeconomic environment, venture capital is expected to return 14.6% annually from 2021 to 2027. Recognizing the value of these asset classes under current market conditions, family offices, known for their prudence, are seeing the bigger picture. In 2022, a large majority (80%) of family offices chose to invest in private equity or venture capital notes UBS. This is the only asset class that has consistently seen an increase in the number of family offices making allocations year over year. In fact, the number of family offices investing in private equity and venture capital rose from 75% in 2020 to 77% in 2021.
According to Alumni Ventures, private investments can also provide access to a wider range of investment opportunities. As the number of publicly traded companies has declined, the number of private companies has been steadily on the rise. This has particularly impacted the availability of small- and mid-cap investment opportunities, as these companies are often acquired by private equity firms. Investing in private companies can provide access to emerging and high-growth industries that may not yet be well represented in the public markets. Private investments, and especially venture capital, can therefore provide investors with the ability to capitalize on unique and potentially lucrative investment opportunities with the excitement and promise of helping new companies drive the economy forward.
Diversification within a venture capital portfolio.
With Alumni Venture’s democratization of venture capital, this asset class has become a tool for diversification for many more investors. Alumni Ventures wants venture capital investors to note that it is also important to diversify within the venture capital asset class itself because companies at different stages, industries, and locations may experience varying rates of growth and success. It is challenging to predict which companies will be most successful early on in their development, and having a diverse portfolio that includes exposure to a wide range of venture capital-backed industries, is beneficial for investors. This approach offers a prudent balance of risk and reward when entering the venture capital market.
A vast network of connections is crucial to creating unique access to diverse opportunities in venture capital. Alumni Ventures has built a successful business model by establishing 20+ funds for alumni of leading universities known for their entrepreneurial activity. This has allowed them to build relationships with startups and entrepreneurs in their alumni communities and gain access to investment opportunities. The firm’s network of funds allows them to cast a wider net for deal flow and build stronger portfolios by including a diverse range of industries, locations, and stages of investment. By tapping into this large network of roughly 600,000 members, Alumni Ventures is able to see more opportunities and create better combinations for portfolios. Through not only a policy of diversification, but an entire system and infrastructure built on it, Alumni Ventures hopes to demonstrate how individual investors can diversify and potentially outperform by starting to invest in venture capital through its funds.
About Alumni Ventures
Alumni Ventures offers accredited individuals access to network-powered venture capital - a key asset class missing from the portfolios of many sophisticated investors.
SOURCE: Alumni Ventures
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