From our perspective, it is important to get into this asset class tactfully. Here is how.
Venture capital investing requires in-depth research and knowledge of the industry, an excellent network of people generating deal flow and refined industry insights. The deal flows in this industry are asymmetrical, meaning you need to know the right people to be in the right deals, while in the public market, anyone from any place in the world has nearly the same ability to invest.
Several of the most successful and valuable companies started off in the venture capital ecosystem, providing early investors with substantial returns. Based on the Swiss Venture Capital Report 2022, Swiss startups saw investments of CHF 3.1 billion in 2021. That is an increase of 44% since the previous year. Thus, a lot is going on in the startup country of Switzerland, which is one of the most active startup countries in Europe.
In a bid to support the financing of innovative technologies, the Swiss government has amended existing laws on occupational pensions and investment foundations to create a new investment category that allows pension funds to invest in unlisted assets. The change – which came into effect on January 1, 2022 – means that unlisted assets are now considered a standalone category of lawful investments for pension funds, with an allocation ceiling of 5% of total assets.
These types of investments previously fell under the category of alternative investments, according to the law, with an allocation limit of 15% of total assets. The cabinet has amended the regulation for occupational pensions under BVV 2, so that pension funds can invest assets in private debt and equity under the condition that the company's headquarters or operations are in Switzerland.
Thus, the time is now. From our perspective, it is important for pension funds to get into this asset class tactfully. There are three golden rules for them to apply.
First, pension funds’ venture capital portfolios should be overseen by experienced professionals and executed by venture capital experts. Venture capital and most subclasses in the alternative investment category are privately-negotiated, long-term investments that require active management. Therefore, it is critical that pension fund venture capital and alternative investment programs be developed and managed for the pension fund by professionals with expertise in managing institutional funds. Regardless of the ongoing management structure of the portfolio, pension funds should choose experienced venture capitalists to initiate and structure the specific company investments.
Second, pension funds should implement the venture asset management approach. It enables them to reduce overall risk by horizontally diversifying their investments across the lifecycle of venture capital—early, mid and later stage.
Finally: Keep in mind that, according to the Swiss government, pension funds can only invest in Swiss venture capital funds if more than 50% of the underlying investments or companies are domiciled in Switzerland.
