INSUBCONTINENT EXCLUSIVE:
In the wake of the financial crisis, Congress passed regulations limiting the types of investments that banks could make into private
equity and venture capital funds
As cash strapped investors pull back on commitments to venture funds given the precipitous drop of public market stocks, loosening
restrictions on the how banks invest cash could be a lifeline for venture funds.
That the position that the National Venture Capital
Association is taking on the issue in comments sent to the chairs of the Federal Reserve, the Securities and Exchange Commission and the
Federal Deposit Insurance Corp., and the Commodities Future Trading Commission.
The proposed revisions of the Volcker Rule would exclude
qualifying venture capital funds from the covered fund definition.
The loss of banking entities as limited partners in venture capital funds
has had a disproportionate impact on cities and regions with emerging entrepreneurial ecosystems — areas outside of Silicon Valley and
other traditional technology centers,& NVCA president and chief executive Bobby Franklin wrote
&The more challenging reality of venture fundraising in these areas of the country tends to require investment from a more diverse set of
limited partners.
Franklin cited the case of Renaissance Venture Capital, a Michigan-based regionally focused fund that estimated the
Volcker Rule cost them $50 million in potential capital commitments resulting in the loss of a potential $800 million in capital invested in
the state of Michigan.
This narrative unfortunately repeats itself, as we have heard firsthand from investors about how the Volcker Rule has
affected venture capital investment and entrepreneurial activity across the country,& wrote Franklin
&The majority of these concerns about the Volcker Rule have come from members located in regions with emerging ecosystems, including states
like Ohio, Michigan, North Carolina, New Hampshire, Wisconsin, Georgia, and Virginia, to name a few.
It not only small states that could be
impacted by the decision to reverse course on banking investments into venture firms in these uncertain times.
There a growing concern among
venture investors that — just like in 2008 — their limited partners might find that they&re over-allocated into venture investments
given the decline in markets, which would force them to pull back on making commitments to new funds.
Institutional LPs will run into the
same issues they had in 2008
If you used to manage $10B and the market declines and you now manage $6B, the percentage allocated to private equity has now increased
relative to the whole portfolio,& Hyde Park Ventures partner, Ira Weiss told a Forbes columnist in a March interview
&They&re really not going to look at new managers
If you&ve done really well as a manager, they will probably re-up but may reduce commitment amounts
This will bleed backwards into the venture market
This is happening at a time when Softbank has already had a lot of trouble and people had not really modulated for that yet, but now they
will.
Some of the largest investment funds have already closed on capital, insulating them from the worst hits
These include funds like New Enterprise Associates and General Catalyst
But newer funds are going to have a harder time raising
For them, giving banks the ability to invest in venture firms could be a big boon — and a confidence boost that the industry needs at a
time when investors across the board are getting skittish.
Fundraising for new funds in 2020 and 2021 might prove to be more difficult as
asset managers think about rebalancing their portfolio and/or protecting their assets from the current volatility in the market,& Aaron
&This means that VC investing could slow down in 12 & 24 months after the most recent wave of funds (i.e
2018 and 2019 vintages) are fully deployed.
