This article was first published in Private Equity International‘s sister title VC Journal.
Geoffrey Love had no idea what he had gotten himself into. When he took the new job with Wellcome Trust it was to be as an equity manager. But on his first day of work in March 1998 his new boss said, “Never mind about that.” She had a new task for him: Figure out venture capital.
Love was floored. “I had no idea what venture capital was,” he said.
Wellcome Trust had only started investing in alternatives four years earlier and had backed just two venture funds up to that point. The trust was game for more but wanted to fully understand not just the upsides, but all of the risks involved.
Love’s very first task was to break down the economics. The earnest 28-year-old immediately identified a serious problem. “I was horrified at the 2.5 percent management fee and 20 percent of profits,” said Love, whose title today is head of venture capital and equity long/short investments. “I had only worked with public equities managers, which charged fractions of a percent or maybe a 1 percent management fee. I had never seen economics like this.”
Paperwork in hand, he rushed down the hall to alert his boss, Sandra Robertson, who today is CIO of Oxford University Endowment Management. Her response to the shocking news? “She just laughed,” he said. He quickly learned that venture had its own set of terms and few, if any, rules. His job was to make sense of it.
Fast forward 21 years and it’s safe to say that Love became more than just an expert in venture capital. He and Wellcome Trust have figured out how to thrive in the asset class, which has left many an LP bruised and bloodied.
Robertson, who hired Love and was his boss until she left for Oxford in 2007, said Love “always gravitated to venture and I think it’s his ability to build and maintain relationships as well as his intellectual curiosity that have been key.”
The trust’s venture portfolio has handily outperformed a standard VC benchmark and the S&P 500 for one-, three-, five- and 10-year returns. Most notably, its 10-year return stood at nearly 18 percent as of 30 September 2018. That compares with 10-year returns of about 13 percent each for the S&P 500 and Cambridge Associates’ US Venture Capital Index as 31 December 2018.
“The Wellcome Trust has one of the very best long-term investment records in the world, so for managers its backing is a badge of honor,” Michael Moritz, a partner at Sequoia Capital who sat on the trust’s investment committee until March 2018, said via email. Of Love in particular, Moritz said: “He is fair, doesn’t tolerate numbskulls, and can always be counted on not to beat around the bushes. We always know where we stand with Geoff, and that is rare.”
When Love joined Wellcome, it managed about £10 billion ($12.3 billion; €11.2 billion) in assets. Today the London-based trust manages £28.7 billion, making it the fourth-largest charitable foundation in the world, behind the Bill & Melinda Gates Foundation, the Novo Nordisk Foundation and the INGKA Foundation. It was founded in 1936 by pharmaceutical tycoon Henry Wellcome with the ambition of funding scientific research to improve the health of humans and animals.
The value of the trust’s private equity holdings has soared over the past three years, from £5.83 billion in 2016 to £7.13 billion last year. Venture capital is very much the star of the PE portfolio, which includes buyout funds, specialist funds, multi-asset partnerships and direct investments.
The trust’s venture portfolio grew from £2.04 billion in 2016 to £2.82 billion last year. If you look at the PE portfolio as a pie, venture capital is the most valuable slice. It made up more than 39 percent of the portfolio’s overall value last year, ahead of buyouts and specialist funds combined, which together accounted for about 35 percent of the value (specialist funds were the second largest slice, at 18.8 percent, followed by buyouts, at 15.83 percent).
Although the trust doesn’t disclose the names of the venture firms in its portfolio, it is an open secret that one of them is Sequoia Capital. The Financial Times reported in March 2016 that “Sequoia is Wellcome’s largest venture capital partner and it has booked a 3.9 times return on its money since it made its first investment with Sequoia in 1999.”
“Our VC portfolio has been cashflow positive for the last seven or eight years,” Love said. “It’s nice that our distributions can cover our capital calls.”
How did a man who knew nothing about venture capital find so much success? He points to several decisions and strategies by the trust that have allowed it to thrive.
Think long term
Once you decide you want to be a venture LP, you need to commit for the long haul. You can’t run for the hills at the first sign of trouble. VC has ups and downs, just like any other asset class, but the ups can take you to dizzying heights while the downs can plant you face first in the dirt. Venture capital “is the most expensive asset class, it’s illiquid, it’s risky and we have zero control at what happens at the portfolio-company level,” Love said.
“There are crazy guys in California doing God knows what,” he added with a laugh.
All of which translates to: “You need to be compensated for that.”
Wellcome made 40 times its capital with one of its first two VC investments and 20 times with the other, Love said (Wellcome doesn’t disclose the names of its managers). But it also felt the agony of the dot-com crash, which prompted many LPs to stop backing venture, only to return years later after they had missed out on monster returns.
“In 2001, a lot of the funds underperformed,” Love said. “But, on the flip side, we were very lucky that some of the initial partnerships we got into in 1994 and 1995…returned very large multiples of the capital invested. You might surmise who they were.”
Looking back now, Love appreciates the first-hand experience of going through the ups and downs: “We’ve had good times and bad times, but overall it was positive for our portfolio. It gave us the confidence to persist with VC despite the volatility we experienced at the beginning of 2000.”
It says something that Wellcome continues to be an LP in the first two venture funds it backed 25 years ago. “We are structured to be around in perpetuity,” Love said. “Life is a long time.”
Being a long-term investor also means that “no” almost never means “no” forever. Clearly, there are cases where the trust will meet with a manager and “if it’s a bad fit, we’ll never invest,” Love said. But there are other times when the trust may say no to Fund I and II, but will come in for Fund III.
“It may not be a fit for us today, but let’s at least start a dialogue,” he said. A manager who is willing to enter into a long-term relationship without an immediate payoff in sight may be rewarded down the line when the stars align. “Some managers I don’t think we’ve spoken to for many years, but then the time comes,” Love said.
Invest only in what you can manage
A critical discovery the trust made is that smaller is better when it comes to venture, at least for Wellcome. “One of our key risk-management tools is knowing what we’re invested in,” Love said. “We want to be as close as we possibly can with the managers we’re in. We want to know who their portfolio companies are. That way, surprises are minimised. You can’t do that if you have too many relationships.”
From the start of its alternative assets program, Wellcome had relied on Cambridge Associates to recommend investments (Cambridge declined to comment, citing its policy of not discussing current or former clients). By 2005, its VC portfolio had swollen to 50 “hugely diversified” managers. It became clear, Love said, that there were times when “we were committing to funds we knew weren’t any good.”
That all changed with the arrival of Chief Investment Officer Danny Truell in 2005. Truell, who now holds the title of emeritus partner, made a dramatic and fundamental change: He brought VC decision-making in-house and instructed his team to pare down the portfolio.
Truell “decided that our in-house expertise had grown sufficiently to allow us to be independent of consultant advice,” Love said. “He was keen for us to focus around only our highest conviction managers or assets across the portfolio. We prepared a report outlining the difference in the quality of our VCs and who we wanted to stop funding, and he was very supportive.”
Ultimately, Wellcome reduced its number of active VC relationships from about 50 to about a dozen. Today it is actively engaged with 14 venture firms.
Shrinking the portfolio took time. Initially, it just stopped re-upping with underperformers. It explored a secondaries sale several times, but the pricing was never quite right. Finally, after about 10 years, Wellcome sold roughly $1.5 billion in commitments “across more than 30 venture relationships and many dozens of funds in 2014/15, when the pricing was at an all-time high in terms of discount to NAV”, Love said. He estimated that the discount to NAV was about 5 percent, a vast improvement over the 20 to 25 percent discount the market was demanding in prior years.
Wellcome Trust’s “investment team is discriminating, smart and shrewd and – while steady and consistent and willing to support managers through tough times – doesn’t tolerate slackers and laggards,” Moritz said. “Best of all, it is predictable and always willing to help make a connection, share ideas or – even on occasion – break the logjam in hospitals for someone seeking help for a rare disease.” (In 2012, Moritz said in a letter to Sequoia’s LPs that he was stepping back from daily management of the firm after being “diagnosed with a rare medical condition which can be managed but is incurable.”)
Forget about allocations
Rather than take the cash from the secondary sale and double down on VC, Wellcome reinvested it across its entire portfolio. As much as the trust loves venture capital, it is just one asset class in its portfolio. “We try to identify the best assets and partners and invest in those, whether that’s real estate, public equity, venture or whatever,” Love said.
Technically, it does have a PE allocation, but it is “deliberately so wide as to not constrain us,” he said. “There is never any pressure for us to invest.”
How wide is the range? Zero to 35 percent. “We always want to act as one team managing one portfolio, not five teams managing five portfolios,” he said. “We make fewer decisions, but with greater conviction.”
Not being married to an allocation allows you to be particular about the venture funds you ultimately commit to. In the past decade, Wellcome has added just three new venture managers to its portfolio.
Before the trust signs on the dotted line, it must be convinced that a fund will “return £100 million to the portfolio within a reasonable timeframe,” Love said.
It isn’t necessarily interested in the quartile placement of a firm’s prior fund or funds. “We are more focused on absolute returns than on relative returns,” Love said.
At the end of the day, the trust must be able to answer yes to the question: Can a VC manager return 2.5 times its capital over the life of the fund? Said Love: “With capital at risk for five to seven years, that should be good premium to public markets.”
Profile: Wellcome Trust
DESCRIPTION: Charitable foundation
YEAR FOUNDED: 1936
HEADQUARTERS: Gibbs Building, 215 Euston Road, London NW1 2BE, UK
PHONE: 44 (0) 20 7611-8888
TOTAL AUM: £28.7 billion
CIO: Nick Moakes
INVESTMENT TEAM: Nick Moakes, CIO; Peter Pereira Gray, CEO of Investment Division; and Principals Robert Coke, Elaina Elzinga, Geoffrey Love, Lisha Patel and Fabian Thehos.
HEAD OF VENTURE PROGRAM: Geoffrey Love, head of venture capital and equity long/short investments. Email: email@example.com.
DECISIONMAKER FOR FUND COMMITMENTS: CIO Nick Moakes, following recommendations and consultation with investment team.
SIZE OF PE PORTFOLIO (including VC): £7.13 billion
SIZE OF VC PORTFOLIO: £2.82 billion
% ALLOCATION TO PE: No official target
% ALLOCATION TO VC: No official target
SAMPLE OF FUNDS IN VC PORTFOLIO: Doesn’t disclose names. Reported to be a long-time investor in Sequoia Capital funds.
HOW TO PITCH: “The best way is a warm introduction through someone we already invest with, but we do occasionally meet new funds that email us cold that we think could offer something different to our roster of managers,” Love said.
US AVAILABILITY: Love and his colleagues travel to the East and West Coasts of the United States six to eight times a year. “We usually try and plan a trip around an annual meeting or advisory board, and then build other meetings around it,” said Love. “We always try and find time for meetings with new managers when we travel.”
WHAT IT LOOKS FOR: A return of 2.5 times its capital over the life of the fund.
FUND SIZE PREFERENCE: Minimum of $150 million to $200 million.
TYPES OF FUNDS IT WON’T INVEST IN: Not interested in seed-stage funds or growth funds.
INVESTMENT SECTOR PREFERENCE: None. With regard to tech funds, it doesn’t like “overly focused funds”, such as funds targeting only e-commerce or SaaS investments.
INVESTMENT STAGE PREFERENCE: Prefers early-stage venture.
GEOGRAPHIC PREFERENCE: None. It aims to back the best managers, regardless of location. Currently, about 65 percent of its managers are based in the United States, 30 percent are in Asia (China and India combined) and 5 percent are in Europe.
TYPICAL COMMITMENT SIZE FOR VC FUND: Undisclosed
MOST RECENT COMMITMENT: Invested undisclosed amount last year in unnamed California firm. It was a new relationship, but the trust had known the primary partner for years. The partner’s prior firm had become “uninvestable” and he had moved on to reboot an existing franchise.
TOTAL NUMBER OF VC FIRMS IN PORTFOLIO: 14
TOTAL NUMBER OF VC FIRMS/FUNDS BACKED IN PAST 10 YEARS: 4
COMMITMENT PACE FOR VC FUNDS: Undisclosed
INTEREST IN EMERGING VC MANAGERS: Will consider.
YES/NO RESPONSE TIME FOR NEW RELATIONSHIP: Four to six weeks
YES/NO RESPONSE TIME FOR EXISTING MANAGER: One to two weeks
CO-INVESTMENTS: Yes. Most of its co-investments are made alongside buyout funds, but it occasionally invests in VC-backed companies. Examples include Alibaba (prior to IPO), DoorDash, Instacart and Twitter (prior to IPO).
DOES IT MAKE MISSION-RELATED INVESTMENTS? No.
Sources: Wellcome Trust and Geoffrey Love, Head of Venture Capital and Equity Long/Short Investments.