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Friday, March 19, 2010

The Next Asset - Financial Planning

The Next Asset - Financial Planning With small- and micro-cap choices shrinking, should advisors turn to venture capital to fill the gap? By Joan Allen Schriger and William Banks Traditionally, those seeking additional growth would consider increasing exposure to small- and micro-cap equities to juice up potential returns. The problem, though, is that this asset class just ain't what it used to be. The Sarbanes Oxley Act of 2002, ... has created an environment where the most innovative companies-... are opting to stay private until they are more mature. What's left in publicly traded micro- cap, ... is a bit of a used car lot. To a great extent, the micro-cap space was diluted by mature companies whose businesses are flat or declining. Today, over 40% of the companies in the index are in financial services, durables, consumer staples or utilities-not sectors typically equated with high growth. For those seeking the risk/return characteristics that small and micro-cap used to exemplify, we believe the best opportunity resides in the private marketplace of late-stage venture capital. There are some practical challenges, however. Access is critical. The trouble is, venture capital has long been an exclusive club. ... Typically, there are limited LP slots available to invest in VC funds and the top funds are oversubscribed through legacy relationships. So, how does one incorporate venture as a part of a core portfolio allocation-...? ... Many advisors and consultants have structured SPVs (special purpose vehicles) specifically to accommodate these opportunities for their clients. These vehicles may be structured as LLCs, LPs or other pooled investment vehicles. Whatever the structure, the purpose is to pool together either direct deals or limited partnership interests in order to allow clients to get broader diversification in manageable investment increments. This is one way to go, and it allows for diversification across a client base where daunting minimums might otherwise prove insurmountable. The next wave is toward providing institutionally managed structures that make these private investments more accessible and economical for a broader group of investors, and that allow for better integration with the core portfolio. ...