Aberdeen, Which Invests In Top VC Funds, On Its 2016 Outlook

Earlier this year, FLAG Capital Management — an asset manager that has backed a long list of top venture firms, including Accel Partners, Andreessen Horowitz, Redpoint Ventures, Spark Capital and Union Square Ventures — was acquired by the British fund manager Aberdeen Asset Management.

The terms of the deal weren’t disclosed. But the union created a giant that manages $15 billion in private equity assets – money that many venture firms will invariably be competing to attract when they hit the fundraising trail next year.

To get a sense for how Aberdeen views the market right now, and who’s liable to see a check from the firm in the coming months, we chatted earlier today with its head of global venture capital, Peter Denious. Our conversation has been edited for length.

TC: It’s a little choppy out there. Meanwhile, your job is to fund venture capital firms. Are you nervous? Are you planning to pull back a bit in 2016?

PD: As it relates to venture, there won’t be any changes in our strategy. A lot of time was invested in this point [when we were being acquired by Aberdeen], and we plan to stay true to our model, which is to invest about $100 million per year in early-stage venture funds.

TC: So you aren’t troubled by private-company valuations trending down right now.

PD: I think it’s somewhat overdue. We aren’t interested in watching markets get overheated. I wouldn’t be surprised if we see more volatility in 2016, but I think it imposes more discipline on the private market.

TC: What about interest rates? Would a rate hike, expected to be announced tomorrow, impact your work?

PD: For all asset classes, there will be some ripple effects for sure, but it’s probably going to be most muted in the case of venture capital and it wouldn’t change how we approach the business. I suspect it will have more of a dampening effect on capital flowing into other alternatives, including the buyouts space.

TC: You sound so positive about venture capital.

PD: It’s been a banner year for distributions for the industry and certainly for FLAG, and now Aberdeen, where we’ve seen record-setting amounts of cash returned. That’s really a reflection of what happened very early this year and last year, when a lot of companies went public; VCs have to work off those lock-up periods, and that takes time. But we’ve had the good fortune of being able to send back a lot of money to our investors.

Of course, IPOs are now down 50 percent year-to-date by dollar amount. We’re way off the pace we were on last year. I think in terms of distributions, everyone is planning for a quieter year.

TC: You’ve been in this industry a long while. Any predictions about the many new sources of capital we’ve seen flood into the market in recent years? Will those mutual fund and hedge fund investors back away now that things are looking overheated?

PD: We could very easily see some departures from the market. I think it’s a little early to say whether there will be wholesale we’re-not-investing-in-any-growth-rounds-anymore kind of thing, but it’s certainly possible. The yellow flashing light is on.

TC: Earlier this year, you created a presentation about the various unicorns in your portfolio. Given their valuations, you questioned whether investors were taking enough money out of those deals. Is that still a concern?

PD: On the issue of early-stage venture managers taking chips off the table, we’d done a study on this, and we were surprised there was as much activity as there was of managers selling into these rounds, but it wasn’t as much or as widespread as we’d like.

Of course, it’s easy to say that VCs should have been more proactive about selling into these financing rounds. It’s harder to do it. And now, it’s gotten even trickier given the valuation climate and all the attention being paid to late-stage dynamics. We’ll see if that continues.

TC: What about special purpose vehicles, which are basically pop-up funds that VCs form to funnel more money into particular startups. Any thoughts on whether they’re good, bad, or neutral?

PD: I don’t have a blanket statement to make here. It’s really a question of each company and its growth prospects.

TC: SPVs seemed to be everywhere in 2015. Were you pitched on many? Did you participate in any?

PD: We were probably pitched on 15 to 20 and we invested in one. We’re never going to let a co-investment strategy define what we do. We’re also just being very careful, particularly given where we are in the cycle. We want to keep the bar especially high. We’re active and looking and SPVs are one of the structures [that investments] sometimes take, but we’ve been very careful given the valuation climate.

TC: Where else might you shop in 2016? Do new managers have a chance with you? How much of your time is focused on analyzing new firms and funds?

PD: Our re-up rate [in funds we’ve backed previously] is very high.We don’t commit a large portion of our capital to so-called new managers or emerging managers, though it’s an important piece of what we do, and we have lots of experience [vetting them].

TC: Do you have a view on the types of managers that can be successful in today’s fairly crowded market?

PD: It’s definitely hard to stand out right now. We’ve backed maybe zero to two [new funds] each year over the last 10 years, and we’re pretty proud of that cohort because they are outperforming [their peers].

The most important criteria to us is who is attracting the best entrepreneurs and why. Is it luck or is it something about them as people and as a firm that allows them to do that? Also, we don’t back first-time investors. We might back a first-time fund of an experienced venture investor, but even then, we have to be convinced that he or she has a differentiated network among high-quality entrepreneurs.

TC: Speaking of partnerships, as someone who is writing checks to venture firms, how important to you is it that they focus more on diversity? Do you ever press them on the issue or do you feel it’s not your place?

Whether it’s gender, race, ethnicity – go down the line – I think having a more diverse group around a table makes for more productive and effective decision-making. [But] you have to counterbalance that with the need to have experience around the table. Our business and the venture business are apprenticeship businesses, so somebody has to grow up learning the business. Kirsten Morin, [a principal] who has been at FLAG and now Aberdeen for 11 years, brings a tremendous perspective to the table as a woman and someone who is part of the [investing] community and who has a different network than I have or [FLAG cofounder] Peter Lawrence has.

I don’t have a neat and tidy answer [to your broader question] but she’s great and I know that what we’re doing works.