Introduction to Corporate Finance

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US$100 billion (spread over 5608 companies) in 2000, before declining very sharply thereafter to just

over US$23 billion during 2010. By 2014, this figure rose to US$49 billion.^3

The bulk of venture capital funding once came either from corporate sponsors (in the case of financial

or corporate funds) or wealthy individuals. However, today institutional investors have become the

dominant sources of funding. Pension funds alone typically account for 25–40% of all new money raised

by institutional venture capital companies. Even though few pension funds allocate more than 5% of their

total assets to private-equity investments, their sheer size makes them extremely important investors.

In Australia, the sources of funding are similar. As the chart (Figure 20.2) shows, in financial year

2015, around 26% of new commitments to VC and PE funds were sourced from sovereign funds, while

23% were sourced from superannuation funds or overseas pension funds.

An important reason why pension funds and superannuation funds are attracted to VC and PE

investments is that they provide opportunities to match the duration of some of their liabilities. Typically,

PE investments require investors to commit funds for a long length of time (often up to 10 years),

with little opportunity for liquidity during their investment term. This can provide a good match against

liabilities to superannuation fund members who are unable to liquidate their superannuation assets

until their retirement. Another attraction is that their high-risk nature and long investment time frames

mean PE investments provide superannuation and pension funds with the ability to diversify investment

portfolios, thereby reducing their portfolio risk – although in Australia, they tend to be slightly conservative

in their attitudes towards risk, preferring later-stage or buyout investments.

3 Source: 2015 National Venture Capital Association Yearbook, National Venture Capital Association, prepared by Buyouts Insider, Copyright

2015 Thomson Reuters, p. 9.

FIGURE 20.2 SOURCES OF FUNDS RAISED BY THE AUSTRALIAN VC AND PE INDUSTRY IN FINANCIAL YEAR 2015

Sovereign

Industry super/public pension fund

Fund of funds

Corporate/financial institution

Private individual

GP commitments

Family office

Public sector

Other

Unknown

2%^

2 6%

23%

17%

9%

5%

2%

10%

1%

5%^

Source: Australian Private Equity and Venture Capital Association Limited. Used with permission. 2015 Yearbook Australian Private Equity and Venture Capital Activity Report,

November 2015. AVCAL in partnership with Ernst & Young, p. 10.