Watch for More New Fund Managers

In the last eighteen months or so, we’ve seen asset prices increase rapidly. I’ve been having debates with friends about this. Most of them think this is a bubble and it will reverse. I think the opposite will happen: asset prices (real estate, equities, etc.) will remain elevated. Prices will go up at slower rate than we’ve seen in the last eighteen months, but they will keep increasing. I have several reasons for believing this, which I won’t get into today.

Equity (i.e., ownership) in companies is key to most investors’ strategy, and I see a change on the horizon in how they acquire it. More investors will look to invest in private companies (private equity) instead of public companies (public equity) via the stock market. The driving force will be the desire for higher returns as the stock market growth rate slows. Again, lots of reasons for this.

The private companies with the highest rate of return will likely be early-stage companies, which puts venture capital—a subset of private equity—in a position to see an influx of investor capital. Some established funds have begun taking advantage of this and have announced they’ve raised sizeable funds this year. We’ll continue to see more of these announcements, but I think we’ll see something else too: an increase in the number of investors stepping out to start their own funds for the first time. Some will come from other venture capital funds, some will be former entrepreneurs, and some will be subject matter experts in emerging fields.

Historically, experience as an investor in venture capital has been key to starting one’s own fund. Experience is hard to come by because most funds don’t have many open slots, so . . . high barrier to entry. As more investors seek equity in early-stage private companies and more capital flows into venture capital, I see this barrier being lowered. More investors will take flyers on people who have unique relationships in and understand emerging sectors well but have zero venture capital experience. Some of these new managers will fail and some—hopefully more—will succeed.

I’m not sure of the timing of all this, but I’ll be watching it closely. We could be on the cusp of a big change in venture capital!