Understanding Fund of Funds: A Primer on Investing in Venture Capital

First Cheque

What is a fund of funds_First Cheque_01 (1920 x 1080 px)

This show is part of the Day One Podcast Network dedicated to founders, operators and investors. Learn about new and upcoming shows by subscribing to the newsletter.

Do you want to learn from the best investors in the world or understand how they make their investment decisions? Sign up to our newsletter to get the next episode straight to your inbox.

Supported by:


Powered by RedCircle

Episode Summary:

In this insightful conversation, co-hosts Cheryl Mack and Maxine Minter unpack the often misunderstood world of ‘fund of funds’—investment vehicles that pool capital to invest in a variety of venture funds rather than in startups directly. Tailored for early-stage investors and industry observers, this talk reveals the nuances of fund structures and investment strategies designed to mitigate risk and maximize returns.

Diving into a no-nonsense explanation, Maxine elucidates the two foundational structures of venture funds—management companies and the standalone investing funds—and how funds of funds play into this ecosystem by investing in multiple funds. This episode shines a spotlight on the intricacies of fund growth, managerial sophistication, and the dynamic relationship between funds, funds of funds, and their limited partners (LPs). Cheryl probes into the motivations behind why LPs choose to invest in fund of funds, including access to top-tier funds and diversification that extends across emerging ventures.

Key Takeaways:

  • A ‘fund of funds’ is an investment strategy where the fund invests in other venture capital funds rather than directly in companies.
  • Most venture funds fail to return capital; however, emerging managers often are part of the top-performing funds, despite potential difficulty in scaling from one fund to the next.
  • Institutions like pension and super funds, which frequently invest in funds of funds, face unique challenges such as VP clauses and monthly asset pricing pressures.
  • Funds of funds can offer investors a lower-risk profile and a more diversified exposure to the venture capital market.
  • There is a potential growth opportunity for fund-of-funds in Australia, which is currently a nascent market in this space.

Notable Quotes:

  • “If you invest alongside, say, CoVentures, and CoVentures has a fund of fund that’s invested in them, what does that mean for the potential success of the company later on down the road?” – Cheryl Mack
  • “Venture funds being an indexation of the underlying assets… Our success is driven by, you know, an outlier in our portfolio.” – Maxine Minter
  • “Emerging managers consistently are in the top ten performing funds of every single vintage.” – Maxine Minter
  • “The venture funds themselves, their returns perform on a power law curve.


This transcript has been A.I. generated.

Cheryl Mack: Okay. Three, two, one. Hey, I’m Cheryl.

Maxine Minter: I’m Maxine.

Cheryl Mack: This is First Check, part of day one, the network dedicated to founders, operators, and investors.

Maxine Minter: If you want to be a better early stage investor, this is the show for you.

Cheryl Mack: So TLDR, if you don’t want to suck at investing, listen up.

Cheryl Mack: Today, we are going to be talking about fund of funds. Which if you don’t know what that is, don’t worry, we’re going to get into that as well. I’m not even a hundred percent sure. So I’m probably going to be learning a lot from Maxine in this episode.


Maxine Minter: I, yeah, it’s a new format for us to experiment with.

Maxine Minter: We’re going to try doing some primers. We’ve got some feedback from you all. That’s really helpful as we do kind of deep dives on particular topics. We’ve got a lot of great feedback about the kind of intro to angel investing. And so please keep that feedback coming. You know, if there are topics you want us to do, An unpack of, do a primer on, let us know, we have a couple of ideas in mind, but this is our first experimentation.

Maxine Minter: We suggest consuming this in parallel with our session with Trang from Transpose Partners because she gives you a great example of how she applies it, but excited to dive in and talk about funds of funds. Yeah. So Cheryl, should we start with what is a fund of funds?

Cheryl Mack: So like, help me understand here. A fund of funds is basically where somebody creates a fund.

Cheryl Mack: Like, if I go out and I’m like, hey guys, or hey LPs, I’m raising a fund. Instead of investing in companies, I’m gonna go invest in funds. And to be clear, not the company that’s running the fund. Like, not the management company, but actually the fund. I’m gonna give that fund money. And I’m going to do that with a bunch of them.

Cheryl Mack: Like how many would a fund a fund typically

Maxine Minter: investing? Is that right? Yeah, no, that’s right. That’s right. So I think they invest anywhere between kind of like 10 funds and the biggest one I know of per fund has invested in a hundred different funds. Whoa. So like big, you know, multi stage, I think. So the first thing.

Maxine Minter: Maybe a couple of reminders here just to make sure we’re kind of anchoring in what this ecosystem looks like. So first reminder is the structure of a venture fund. So the structure of a venture fund is think of it like separate buckets. You have a bucket, which in the U S is called the GP co or the general partnership company.

Maxine Minter: In Australia, we have different. legal structures, but we kind of use the same terminology. So we have a bucket or a company that is the GP code that is like co ventures PTY limited. It is the entity that runs the venture fund. So the like actual company, and then there is a separate entity, a separate bucket that is your actual investing fund.

Maxine Minter: In Australia, we use a kind of range of different vehicles. In the U. S., they use limited partnerships, which is why we have that kind of terminology of LP, but you have kind of different entities which represent each individual fund. So let’s say in CoVentures Fund 1, That is a standalone bucket, and that bucket will invest in 30 different individual companies.

Maxine Minter: Actually, in our case, 33 individual companies. And for that investment, we will receive shares into that bucket. So, into CoVentures Fund 1 and our investors will invest into that bucket. So you can imagine, you know, a large scaled fund like Blackbird or Sequoia, they have multiple of these buckets. So multiple funds, and each of these funds has its own set of Investors that invest into that bucket and the companies that that bucket invests into.

Maxine Minter: Now it gets more complex because over time investors in fund one might invest in fund two and fund three. So you might have the same investors into each of these buckets, but as a structure, it’s actually separate from the end, like the entity that does the running of the venture capital firm. And the entity that does the investing into the companies are two separate things.

Maxine Minter: So a venture, a fund of funds, Is this structure, but instead of investing into the company, it invests into these buckets like CoVentures fund one and is an investor into that. Now there’s complexity into the ways that they invest, but generally speaking, that’s what a fund of funds is. So they construct a portfolio of these funds.

Maxine Minter: anywhere between kind of 10 and 10 and a hundred of them. And they run the strategy very similar to a venture fund runs their strategy into the directs. The kind of second reminder is that the startup ecosystem and returns in the startup ecosystem over the last 30 years have consistently been shown to be driven by outliers.

Maxine Minter: So this is the thing that, um, you will hear a lot of, uh, you know, managers talk about, which is this idea of a power law. The power law is a statistical terminology. It refers to the fact that where there is a distribution of returns in the underlying startups and or the fund managers, your, the majority of your returns are driven by anywhere as little as 10 percent of the actual investments you make.

Maxine Minter: Venture funds being an indexation of the underlying assets. So a venture fund invests in, in our case, 33 companies. Our success is driven by, you know, an outlier in our portfolio. Similar, similarly, the venture funds themselves, their returns perform on a power law curve. So there’s only a handful of funds, venture funds that will deliver outlier returns to their investors.

Maxine Minter: Actually, the majority of venture funds. return less than one X capital. So they just straight lose money.

Cheryl Mack: Isn’t that interesting? Cause, um, I can’t remember who are you talking to, but one of our other guests said that like the jump from fund two to fund three, I think was one of the hardest and that like, you can kind of raise fund two on the like paper value of fund one, but by the time you get to fund three, they’re kind of looking back at fund one and going, okay, well, what did that actually happen?

Cheryl Mack: That kind of seems like that’s part of the reason, right? Like if, if most funds actually fail, you’re going to know that that fund is failing by the time you get to start to raise to fund three, which is really interesting. So like, it would be, it would be basically like me starting a fund and saying, okay.

Cheryl Mack: You guys invest and I’m gonna go invest in Blackbird Square, peg, air Tree, covens, black Nova, Archangel, and every other VC fund that I can name in Australia or globally, right? Basically. But like, yeah. Yeah. Why as an lp, why? Why would you want to do that? Like why? If I can invest in a fund that’s gonna invest in those funds, surely I have enough to just go and invest in those

Maxine Minter: funds.

Maxine Minter: Yeah. I think there’s a really interesting reality here in the. And like the kinds of investor that invests in a funds of funds. So I know, I mean, I think especially for kind of angel investors or operators, this is, it’s kind of a whole world that is fairly opaque and like hard to see into. But very interestingly, you know, for example, in Australia, the super funds, they are deploying so much money.

Maxine Minter: Right? They have so many assets under management that to invest 200, 000 of their billions of dollars in assets under management into a fund that is raising, say, 10 million, just isn’t worth it. The amount of time, the opportunity cost for them to source opportunity, write that check and then like manage that asset is just not worth it.

Maxine Minter: And they don’t want to write a, say 2 million check into a 5 million fund because then they are too overweight for that. that manager. So that manager then has, they’re too overweight with that one LP. And so they actually create risk in the underlying LP. A thread that I want to pull there, you kind of mentioned the like, failure to graduate from fund two to fund three is driven by The potential underperformance of Fund 1.

Maxine Minter: I think what’s interesting, at least as I understand it, the failure to graduate from Fund 2 to Fund 3 sometimes is driven by the complete failure to deliver returns, but more frequently is the failure to sophisticate. your fund, like the venture firm, the actual business, the management company. Oh,

Cheryl Mack: the management company.

Cheryl Mack: Yeah. That’s what Trang was talking about. Yeah. That like, you know, she looks for firms that are actually developed and have a platform for the startups that

Maxine Minter: they’re supporting. Right. Right. So I want to kind of unpack that a little bit because I think it’s relevant for funder funds because similar to venture funds, where we had the, you have venture funds that have like an early stage mandate and venture funds that have like a growth stage mandate.

Maxine Minter: You also have funds of funds that have emerging manager mandates, meaning the manager is on fund one, two, or three. or they have established manager mandates. So I’ll come back to that in a moment, but the kind of failure for our funds to graduate from fund one to fund two, fund two to fund three is actually very similar or as a way that I understand is very similar to the failure for startups to make it to scale from

Cheryl Mack: like seed to

Maxine Minter: series a.

Maxine Minter: Yep. Yeah. So, so interesting. Yeah. It’s fascinating, isn’t it? How the way that it kind of like mirrors down to the stages. Um, so. The failure to graduate from fund one to fund two and fund two to fund three is, you know, you fail to make money. You invest in a bunch of companies that don’t make money. You fail to keep your partnership alive.

Maxine Minter: So partner breakup in early stage fund managers is a very common reason that they’re not successful. You know, the companies are not successful. Sorry that the funds are not successful. Um, so kind of anchor here though, interestingly, at the fund manager level, the timeline for success is way longer. So fund one, fund two, and fund three, you are treated as an emerging manager.

Maxine Minter: Um, which is a nice way to say like, you’re essentially a rookie. We don’t know whether you’re any good at this or not. Like pre revenue. Yeah. Yeah. So like, we will treat you as a novice for this and fund what, well, like general fund deployment periods during 2021 and 2020 and 2021, they got down as low as two years, but they’re mainly like three or four years.

Maxine Minter: So we’re talking about a period of time you’re treated as a novice. That’s anywhere from like. Nine years to 12 years. Could you imagine doing something for 12 years and being like, Hey guys, I’m a novice. Yeah. I mean like, yes, I can imagine it because it’s what I’ve just signed up for. It’s like, right.

Maxine Minter: It’s kind of a wild experience. But imagine if you were like skiing and you’re like, yeah, I’ve been skiing for nine years, still a novice. Yeah. Yeah. Still a novice, like a complete rookie. So there’s also the kind of. element where, um, funds of funds that invest in kind of experienced managers. Or not emerging managers.

Maxine Minter: They’re essentially, they have anywhere between nine and 12 years worth of fund track record. And you just usually, you know, a number of years of angel investing track record. And so over that period, given the nature of this underlying asset class, you should be able to show that you. Number one can invest in interesting companies.

Maxine Minter: You can find them, you can win them and you can invest in them. You should start to see some distributed capital back out to investors. So you should start to see some, what they call DPI, you know, the amount of money distributed versus the amount that was paid in distributed to paid in. So you should start to see that DPI back to.

Maxine Minter: Investors so that they can, they can look at that essentially like at the underlying company level, it’s that validation that, Hey, you actually build a company that made money. And then also they fail to make that graduation from fund three. to institutional level because the company that they’ve built, the kind of management code that they’ve built, isn’t ready for scale.

Maxine Minter: And so you can imagine if you’re a big super fund or a big pension fund, you need a level of sophistication with your fund manager that is above and beyond just the ability to find and invest in interesting companies. You need certain, certain security requirements. You need, you know, in these days, certain ESG requirements.

Maxine Minter: You need, um, A certain level of finesse and sophistication on your actual investment process. You know, you need to be able to report to them in a really scalable way, a whole bunch of information about your portfolio companies. You need to also be able to show that track record. So you’re like, as an investor de risked, reminding that these fund managers, or sorry, like these big pension funds, like they need to report to their investment committees to be able to say like, this is a, you know, quality.

Maxine Minter: A highly capable investment fund manager.

Cheryl Mack: But you talk about this in the sense that like you’re saying, it kind of sounds like you’re saying that only big institutionals or supers are investing in funds of funds. Surely other people like, you know, the way that Trang was talking about it, like she talks about it, that there are individual LPs, surely there are family offices and even individuals like me, like, would it, would there be any value in, what if I wanted to invest in a fund of funds?

Cheryl Mack: Let’s say I, you know, I had an extra million dollars lying around and wanted to throw it into a fund of funds. Is that, like, am I just not the target market? Are individuals not the target market

Maxine Minter: for this? Oh, absolutely. Yeah. I mean, I think they usually have a So, you can imagine, because a fund to fund is investing in a larger number of funds than if you were investing directly, they’re fairly big funds, right?

Maxine Minter: They’re like, yeah, 20, I’ve seen kind of 50 mil plus.

Cheryl Mack: Because like, couldn’t my million dollars go along a much further way, right? If I put a You could. If I went to four funds, give them 250, 000, or I went to a fund to fund and gave them a million bucks and they put that into 50 funds, or, you know, even more than four, at least Yeah.

Cheryl Mack: Would that get me

Maxine Minter: a better outcome, though? Like Well, I think it depends, right? So, like, to answer the first question, absolutely. As an individual, there’s nothing that stops you from investing in a fund of funds other than the buy in being like the minimum check size being very large. The value proposition for investing in a fund of funds is a couple of things.

Maxine Minter: One is, um, there’s the kind of folks, Of like, they sell access, so they have allocations in, in funds like Blackbird or Sequoia or Airtree or any of those like big, very established, successful funds. Those fund managers don’t want to have to deal with the long tail of investors. They want to herd cats and a bunch of individuals in, and so it can be more valuable for them to work with a fund of funds then.

Maxine Minter: You know, into like individually directing, direct investing. And so sometimes, right, if today, even if I had 20 million, I can’t, can’t call roll of buffer and be like, hi, I’d like to get into your next month. He’d be like, sorry, we’re fully allocated.

Cheryl Mack: Right. So it’s getting access to funds. Yeah. Okay.

Maxine Minter: Yeah. And so.

Maxine Minter: is like one model, right? The fund of funds sell access. The second is diversification. So there’s, I think I mentioned there, there’s some funds of funds that set that invest in funds, one funds to fund two, and maybe even fund three. So they are emerging manager funds by investing in a fund of funds. You allow yourself to diversify across emerging managers, as opposed to being exposed to a single underlying asset in the same way that you invest in a fund to diversify across startups.

Maxine Minter: So you’re

Cheryl Mack: mitigating that risk for the funds that aren’t going to survive.

Maxine Minter: Correct. Yeah. And so, you know, emerging managers consistently are in the top 10 performing funds of every single vintage for the last, you know, 15 years, they’ve been anywhere between 40 to 80 percent of the top performing funds of every single vintage.

Maxine Minter: Emerging managers are more capable of finding kind of under exploited opportunities in the ecosystem because they’re generally investing out of smaller funds. They’re also generally kind of closer to the opportunity set than they were previously. Sorry, than a big, like large, uh, fund like a Sequoia. And so interestingly, they can continue to deliver higher percentage returns.

Maxine Minter: But the challenge is, is that, you know, let’s remind ourselves of the drop off rate, their, their success. Yeah. I was going to say like,

Cheryl Mack: that’s such a conflicting view between like most of these funds don’t survive, but also they’re more likely to find the winners. Like that makes no sense to

Maxine Minter: Right. I think it goes back to you know, the ability to survive and build the business around the fund that you’re driving.

Maxine Minter: Let’s remind ourselves of the structure of the venture capital fund, right? You have a management co. And so as a fund manager, your job is to build that business. So that is the kind of co ventures PTY limited in Australia. And then you have the actual fund that you build co ventures fund one. And so.

Maxine Minter: That co ventures fund one, you might find three or four amazing companies in that group, but your ability to sophisticate the management code to the point that institutionals Might not be there. Or you might like, let’s say you have a three year period where, because you have particular one particular insight in the ecosystem, or there’s a particular moment for alpha, you might deliver this incredible fund one, but fund two sucks.

Maxine Minter: Or you just don’t get lucky. Right. Or,

Cheryl Mack: or you make such a good investment that you, your carry is like a billion dollars and then you’re like, well, why do I even bother?

Maxine Minter: Right, yeah, you know, I think all of those things are possible. And so there’s many reasons that a fund manager doesn’t graduate fund one to fund two, fund two to fund three, fund three to fund four and institutional grade is that are not correlated to the success of the funds that they actually run.

Maxine Minter: Do we have any funds of funds in Australia? Do you know any? I don’t think so. I don’t think so. So I think, I can’t think of any off the top of my head. You have a bunch of family offices that run They

Cheryl Mack: invest in multiple funds.

Maxine Minter: Yeah. Yeah. Yeah. And then you have a bunch of like multi family offices that invest, like maybe pool capital together and then invest in a bunch of funds.

Maxine Minter: But I wouldn’t think of that as a fund of, like a traditional fund of funds. No.

Cheryl Mack: Usually they’re doing that through, like, a wealth manager rather than, like, a fund manager, right?

Maxine Minter: Yeah. Usually, there are some examples of a multifamily offer, like, multifamily offer, so they’ve got, like, one entity that a couple of families will invest into, and then that entity invests into funds as well as directs, um, but I wouldn’t think of that as a more traditional fund of funds.

Maxine Minter: No. A more traditional fund of funds would be, like, Trang, right? Like, she, like, builds a vehicle. She gets a whole bunch of investments into that vehicle, and then that vehicle goes and invests behind a particular thesis with a particular, like, support mechanism for a particular kind of asset. And she manages that asset, and then she distributes capital back to her

Cheryl Mack: investors.

Cheryl Mack: Yeah, which in her case is finding exceptional Fund managers backing them, supporting them and then getting the returns from those.

Maxine Minter: On fund one and fund two. Yeah. So she is an example. Transpose Partners is an example of a fund of fund that has a emerging manager thesis. Whereas like HarperVest, which is a huge asset manager, multi stage asset manager, they have an emerging manager strategy, but they also have fund of funds that sell access.

Maxine Minter: So they are in like Excel, Sequoia, et cetera.


Cheryl Mack: seems like there’d be an opportunity in Australia to build something that would invest in, in at least some of the more emerging funds. A hundred percent. Right. If we have this thesis that, or we have data that backs that they are more likely to find some of the the bigger outliers in the next generation, right?

Cheryl Mack: And if, if, you know, we’re going into this new period of possibly looking like the, you know, the kind of 08 to 2012 period where some of the greatest wealth creation in history was, was created, and we’re going into another period of that, you know, looking at, Some of these early funds are coming up now like co ventures and assuming that they are probably going to find the next, uh, the next canvas of the world.

Cheryl Mack: You know, maybe we should convince someone to

Maxine Minter: start a fund of funds. Yeah. There’s a couple of people playing around with it in Australia in various versions of it. Like a venture firm, there are, there are like multiple ways you can chase this strategy. And so like multiple different ways that you deliver the business of getting access to emerging fund managers.

Maxine Minter: I do think. So, something to name with the fund to fund model, so a reminder, venture capital firms generally operate on a two and twenty model. Yeah, I was going to

Cheryl Mack: ask about the fees, like how, yeah, are there fees on

Maxine Minter: fees here, or? Yeah, there are fees on fees. And so, the challenge, I think, in the Australian market is, and across markets, but for this strategy, is, You have the underlying fees from the venture fund, which is 2 percent of committed capital per year, um, in management fees.

Maxine Minter: So for the venture, for the fund managers actually run the venture capital, like business, and then you have a 20 percent carry. So that means of the profit that a venture, like the actual fund makes the fund manager, so the co ventures PTY limited gets to take 20 percent

Maxine Minter: So that’s commonly known as the two and 20 model. So you can imagine as a fund of funds, you have the same needs, right? Like you need revenue to be able to run the company that does all the sourcing, that does all the evaluation and all of the support. So there has to be some fees on the capital that is allocated.

Maxine Minter: Uh, and also you take carry. Great. Now they generally, because it is a less actively managed asset, they generally take less fees and less carry. So I’ve seen anywhere between kind of a zero and 30 model through to a kind of one and 10 model. Zero being

Cheryl Mack: no management fees, no management fees, but only Thirty, maybe thirty percent.

Cheryl Mack: Okay.

Maxine Minter: So you can imagine 30 percent carry stacked on 20 percent carry starts to be extremely expensive on the success. Yeah. So the way that that makes sense from a returns profile perspective is, uh, we just take that those investors into the fund of funds are thinking about, okay, what’s my return profile net of fees.

Maxine Minter: So you’re thinking about de risking here versus how much, you know, return you’re getting for it. So maybe it’s for those folks that are running a kind of wider strategy. For some in the U S it’s very common. for the like big pension funds to run an emerging manager strategy as essentially a sourcing vehicle for them.

Maxine Minter: So it comes out of a different allocation pool than it comes then from the kind of direct investments, but it is, you know, it’s still an expensive model to run. So as a manager of a fund of funds strategy, you need to be very thoughtful about the way that you structure your fees and stack your fees so that it’s still net of fees, meaning the return that an investor gets after the fund manager has taken all of their fees, it’s still an attractive option for those fund allocators.

Maxine Minter: And you

Cheryl Mack: really need to think about it in terms of like, Are you really going to get that, like, theoretically, you, if you’re more diversified, right, like, you invest in a fund so that you can get more companies, you invest in a fund of funds, you can get exponentially more companies, and, you know, Trang has thousands, but like, do we have to buy in, you would need to buy into the thesis that more diversification equals better returns,

Maxine Minter: right?

Maxine Minter: Well, risk adjusted returns. The nuance there is risk adjusted returns. So you would, more diversification means technically you’re taking less risk because you’re not exposed to a single fund or a single startup. You are exposed to anywhere between 10 and 50 of them. And so you are more likely to find that fund that returns, you know, like Blackbird fund one is like on a 45 X or something like it increases the probability you find something like that.

Cheryl Mack: Okay. Yeah, but like, can you really do the math on that to say, I, I believe that because I’m 10x more diversified, that I will have, what, a 10x better return? And that justifies, it’s not 50%, right? So it’d be 20, it would be 20 percent carry on, and then 30 percent on that. So like, it would, I think

Maxine Minter: the math you’re doing here isn’t like, I’m investing in 10 X more companies and therefore I need 10 X the return profile.

Maxine Minter: The math you’re doing is the probability, so for example, if I chose to invest directly myself into a bunch of companies versus invest in a single fund manager versus invest in a fund of funds strategy. At each of those layers, what’s the probability that I find, find the outliers? Because ultimately, that’s what we’re trying to do here, right?

Maxine Minter: Like, we’re trying to find the outlier return. We’re trying to find those, like, 10 to 100 X. 1000 X returns, the canvas, right? The canvas, yeah. So, we’re, because because we’re investing on a, um, a power law, I think it’s important to remember that we are, like, thinking about both the long tail and how long that long tail and how negative that long tail is.

Maxine Minter: and how that counterbalances the success. So in the underlying companies, you have a bunch of zeros. Whereas at the fund level, you probably don’t have a bunch of zeros. You might have a collection of one Xs. Maybe you have a one, a zero, but you have a collection of one Xs.

Cheryl Mack: Yeah. Like most of your funds return at least one.

Maxine Minter: Yep. Yeah, correct. And so the fund construction is different from a fund of funds perspective than it is for a portfolio construction perspective. So as an investor into a fund. So it is less risky. It’s less risky. Yes. It’s a hundred percent less risky, but it also runs the risk of, uh, In the same analysis you would do with the underlying portfolio, you also run the risk of it being less value creating for you, right?

Maxine Minter: Yeah. You might not find that, that outlier, but because you’re taking less risk, you shouldn’t expect a higher return, right? Return is a function of the risk that you are taking to be compensated for that risk. So because you’re taking less risk, you should expect to have less return.

Cheryl Mack: Yeah. I mean, well, that’s, that’s why we invest, right?

Cheryl Mack: Like you, I could go and invest in an ETF or I could go and invest in individual stocks or bonds, but I choose this and this is just a slightly less risky version of the same type of venture investing, right? We’re just sliding up the scale, still same asset class, but actually sliding up the risk scale, which I think is actually an interesting approach.

Cheryl Mack: If you were more risk averse, but wanting to still invest in this asset class, doing a fund of funds model means that you. probably will get, you have less chance of making like, you know, the thousand x returns I’m going for when I invest in an individual company, but you have a higher percentage, you have a higher chance of, you know, not losing all of your money like I do when I invest in an individual company.

Cheryl Mack: So I could see, That being a, a, a driver of wanting to invest in

Maxine Minter: funder funds. I also, I mean, like, it is also a reflection. So for a lot of the people that invest in funder funds, they are large institutional asset managers.

Cheryl Mack: Yeah. But individuals must

Maxine Minter: do as well, right? They do. But it’s a smaller percentage of it.

Maxine Minter: Right? Yeah. Like you can imagine if you’re raising like a 50 to 100 million dollar fund, you know, for a lot of them, minimum check size is a million dollars, and there’s only a handful of people in the world that have, you know, portfolios of 50 million of investable assets. And, you know, 10 percent of that is going into.

Maxine Minter: You can put 10 percent

Cheryl Mack: of that into alternative

Maxine Minter: assets. Yeah. Internal assets. Right. So like we’re talking about. a asset class here that is only available to the ultra wealthy, which is why there’s not a lot of information about it. Well, that’s why

Cheryl Mack: we’re having this conversation, right? So we can, yeah, share more.

Cheryl Mack: I think what’s interesting for our group of investors out there who are emerging managers or investors, Early angel investors, or even just angel curious is just how that, um, relationship between like funds and other funds work and what that means for the downstream effects on the types of companies that you invest in.

Cheryl Mack: Right? Like knowing that, uh, if you invest alongside, you know, say co ventures and co ventures have a fund, a fund that’s invested in them, what does that mean for the potential success of the company later on down the road? Does it mean more money for them? Does it mean more support? Does it mean. Less support?

Cheryl Mack: Like, does it mean anything?

Maxine Minter: Yeah, that’s, I think, I think a really interesting question. I think there’s probably a nuance I would add here in that the Australian fund of fund ecosystems is largely like a fund of funds business that is coming out of a bigger asset manager. So like a super fund or a, like, big bank, um, they are investing in the venture capital ecosystem for those funds.

Maxine Minter: Venture, those VCs, to invest directly. And that differs from who is investing in the U. S. or who are the big kind of anchor LPs in the U. S. The big anchor LPs are endowment funds. So the kind of Yale and Harvard endowments are the ones that And the

Cheryl Mack: Ontario Teacher’s Pension

Maxine Minter: Plan. Yeah, yeah, yeah. Like CalPERS, the Californian uh, pension for, I think they’re like, I think they’re medical professionals or something like that.

Maxine Minter: Anyway, they’ve got these big, but those, I mean, Ontario and CalPERS and those folks are slightly different, right? They operate very similarly to a super fund because they are pension funds. So the nuance here is as a pension fund Wait, what’s an endowment fund then? An endowment fund is the universities.

Maxine Minter: So universities in the U. S. are big asset managers. Because they’re getting an enormous amount of endowments, so gifts from their former students to the university to be able to fund the university’s continued operations. And they’re inves investing like billions and billions and billions of dollars of assets to then have a return on those assets and they use the return on those assets to fund university activities.

Maxine Minter: So the, the distinction here is that as a pension fund, you’ve constantly got people buying units, right? Like every single month. In Australia, you have payroll run, and every single payroll that is run, 11 percent of that goes into a super fund. And that 11 percent of, of monthly payroll in Australia, you are purchasing units in your super.

Maxine Minter: So you are buying the then present value of the assets that a super fund can deliver to

Cheryl Mack: you. That is so interesting. Do you think, I mean, I certainly. Never really thought about the fact that actually each month, technically, I am investing in a fund. Yeah. That is managed by a fund manager. Yeah. And growing my own wealth that way.

Cheryl Mack: Like, I just don’t think about it. You think, oh yeah, I’m saving for retirement, but no, it’s actually every single month I’m buying into, I’m buying more into

Maxine Minter: a fund. Yeah. That’s, that’s true. I have like, as a side note, not to get too distracted on this, but I get quite frustrated when I talk to people and they’re like, Oh, I’m not an investor.

Maxine Minter: Yeah. I don’t know how to invest. And I was like, actually, incorrect. You are. If you earn payroll in Australia, like, you are passively investing. The fact that you never thought about it, and the fact that you have, like, not engaged in that concept of being an investor, like, that’s a separate thing. But, like, the fact of the matter is you are making an investment.

Maxine Minter: You made an investment decision when you decided your super fund. And you are consistently And you are passively making an investment. Yeah. That’s

Cheryl Mack: pretty cool to think about, though. Like, what if we could mobilize People to understand that a bit better and then be more engaged in the way that they invest just based on the fact that, hey, you’re already

Maxine Minter: investing.

Maxine Minter: Hmm. Like I think it would be amazing, even just the small step of looking at your super construction, like most super funds will give you a nice little slider to say, I wanna take more risk or less risk. And maybe even like checkboxes of the kinds of products that they run that you can A nice little slider.

Maxine Minter: Just slide

Cheryl Mack: that little bugger

Maxine Minter: over. Just slide me over. Super

Cheryl Mack: risky. Lose all my money side. It also begs the question, like, If these super funds continue to grow and grow and grow, how does that affect the venture space, right? Let’s bring this back to our space, right? Like how does that affect our venture space?

Maxine Minter: Well, I want to come back to that, but the nuance that I want to add here, because I think to answer your question, why does this matter as a fund manager is as a fund manager, you are holding an asset that is priced every 12 to 24 months, right? The revaluation moments are when there are new investors that come into venture.

Maxine Minter: You know, through one layer of abstraction, the biggest investors in this entity are getting priced every single month. And so what we saw over this period is a lot of pressure from the pension funds and the super funds to their fund managers to reprice their private assets. Because they were holding a bunch of assets that hadn’t been repriced because there was no further valuations.

Maxine Minter: Rounds, yeah, because startups weren’t raising rounds. Correct, so they were like overpriced relative to what the super funds believed them to be. And proved out to be, right? Like if, I think Canva got up to 62 million, sorry, sorry, 62 billion. There were some

Cheryl Mack: revaluations. Yeah. Yeah. And then it got revalued.

Maxine Minter: Yeah. So you saw Blackbird do that revaluation and then they’re gonna, et cetera. Whereas in the U. S. there wasn’t that same push because as an endowment fund, no one’s buying units in your endowment every month. Ah. And so the biggest, the biggest pressure that I see or difference in pressure and how kind of big institutionals matter for your underlying investments is that kind of how they are reporting the value of your assets.

Maxine Minter: And the second is vice clauses. So vice clauses as a fund manager, you sign a contract with your, the company, sorry, the fund of funds and individuals and the institutions that invest in your fund. And you essentially say, I am committing to invest in this kind of company with these kinds of processes over this kind of time period.

Maxine Minter: And then you make a bunch of commitments not to be a psycho or fraud or, you know, et cetera. And also in that contract, you say, I will not invest in X, Y, Z. And these are vice clauses. They are very commonly, you know, sex, drugs, alcohol, things of addiction, etc. Ah, like vice tech. Yeah. So those vice clauses.

Maxine Minter: Essentially say to the fund manager, you can’t invest in anything that looks like this. So practically, we’re seeing this be a real problem for anything in sex tech. A lot of Australian super, you know, anything in the sex, sex tech space, you know, trends too close to those vice closers, so fund managers won’t touch them.

Maxine Minter: Anything in the kind of addictive substances space, so in the U. S. there’s like the cannabis ecosystem is a real problem here. Yeah. Also, I believe you still can’t transact at IPO with a cannabis company. on the NASDAQ or any of the big stock exchanges in the U. S. So vice clauses are really relevant here.

Maxine Minter: But other than that, it shouldn’t change how a fund manager manages and invests in companies. underneath. There is a reason that you’re there, you know, a big institution or individual is investing in a fund manager as opposed to investing directly in that they are giving that ability to decide and manage to the fund managers and paying decent fees in order to be able to do it.

Cheryl Mack: Yeah. I think a lot of funds have vice clauses though, not just in Australia. Oh, no. All over the world. Yeah. All over the world. Right. Like I, most funds will say, no, I don’t invest in that. Even if it’s something like I saw one that was to help people quit smoking or drinking. I can’t remember which one, but they’re like, sorry, like it has to do with drinking.

Cheryl Mack: So no. And it’s like, no, but it’s to stop. No. Okay. Well, we’ll, we’ll just see ourselves out then.

Maxine Minter: Yeah. Yeah. Yeah. It matters all over the world. Let’s remind ourselves that the big investors into these funds are universities, hospitals, pensions, pension funds. And so it matters what they make commitments that they will invest in things that don’t do any harm and those kinds of things.

Maxine Minter: And so they pass them on to their fund managers because they have to. Yeah. Rightfully so. I think it’s an important thing, but I do think that they are. Slow to change and outdated, leaving a lot of value on the table. Yeah.

Cheryl Mack: Super interesting in terms of funds of funds. I’m really excited to see, like, obviously Australia is super nascent when it comes to this, the fact that we could barely name, you know, any funds of

Maxine Minter: funds.

Maxine Minter: I don’t think there’s one. Yeah. If you’re a fund to fund listening and you exist in Australia, please reach out to me. I would love to know that you exist. I get an enormous amount of fund managers that reach out to me, especially emerging fund managers that reach out to me for like advice and like support as they’re raising their.

Maxine Minter: They’re funds. So if you exist and would like some deal flow, I have some folks for you. Or at the very least, just like start a website. Yeah.

Cheryl Mack: Or, or at least we will know about you. We can mention it on another episode. Yeah. We can, we can take a look. So I, yeah, I think, um, if there isn’t though, then that’s probably maybe in the next frontier for Australia is what that looks like for us as we, as we mature as an ecosystem.

Cheryl Mack: I hope

Maxine Minter: so. Yeah. I hope so.

Cheryl Mack: Amazing. Well, awesome. Thank you, uh, for this insightful session, Maxine. I learned a lot and hopefully this will, uh, help people with, um, listening to the training episode. And when we say in parallel, not at the same time, like maybe before or after.

Maxine Minter: Yeah. I don’t know that we needed to clarify that, or maybe we did.

Maxine Minter: Maybe someone was like, Oh, I have to listen to this like with one AirPod in each ear as I listened to both in parallel. That would not be a pleasant experience. Zero to 10 would recommend. Yeah. Awesome. Thanks for your time today, Maxine. Thanks so much. This was fun.


This episode is supported by

Turo – The world’s largest car-sharing marketplace, and it’s the perfect app for travel.

The booking process is so convenient, you can get the car delivered and the hosts are super friendly.

Download the app today!

Scendar – Australia’s OG startup accounting firm catering to all stages of your business’ life.

Free 1 hour consultation about your Business’ growth plans and finance needs.

Contact Scendar today

The Day One Network

First Cheque is part of Day One, the podcast network dedicated to founders, operators & investors.

To learn more, join our newsletter to be notified of new and upcoming shows. The only content we create is content that will help Australian founders.

If you want to learn about upcoming guests and when a new First Cheque episode is available, join the First Cheque newsletter.

Sponsor the show

Want to become a sponsor? Send us an email.

Become a supporter, make more of these stories possible.

Follow on social