Venture firms’ distribution strategies vary widely. But one thing many venture firms have in common is that they don’t necessarily distribute publicly-quoted stock at the earliest possible opportunity. On the contrary: many venture firms retain ownership in portfolio companies for many months or even years after the initial lock-up period has expired.
LPs generally take a very dim view of this practice. They believe that it exposes managers to unnecessary risks, which are not offset by a corresponding improvement in returns. Many also object to paying management fees and carried interest to GPs for ‘managing’ public stock. In fact, some investors believe that GPs deliberately hold publicly-quoted stock in order to maximise value creation for themselves – at the expense of their LPs.
Last year, Vencap undertook a survey of twelve top-tier venture firms to gauge GPs’ attitudes towards holding publicly-quoted stock after the expiration of the lock-up period.
Not so risky
Whilst it is interesting to consider absolute gains and losses, it is of course much more pertinent to look at risk-adjusted returns. The Efficient Markets Hypothesis states that GPs should not be able to generate abnormal returns on publicly-quoted investments and, as a result, it would be in the LPs’ best interests for the GP to distribute publicly-quoted stock in a timely manner. But the findings do not support this claim.