RVC Investment Director Aleksey Basov told RBC Quote that removing the barriers that prevent “long” pension money from entering the Russian venture market is necessary.
Throughout its history, the Russian venture capital market has overcome more than one stagnation, adapted to sanctions, and coped with fluctuations in the rouble exchange rate. The new ordeal is the COVID-19 pandemic. But there is hope that the driver of economic recovery will be a high-tech business capable of updating areas such as education, healthcare, transportation, retail, and many others.
Recovering from a recession always requires “long” money. Where to get them? One of the sources may be funds of non-governmental pension funds (NPFs).
The total assets of global NPFs in 2018 were estimated at $35.6 trillion. They buy not only stocks and bonds, but venture capital investments also occupy a significant share in their portfolio — up to 30%. The specific investment policy depends on the social aspects of a country. For example, the California Public Employees Retirement System and the California State Teachers Retirement System heavily invested in Silicon Valley companies. And the New York State Pension Fund, the New York State Common Retirement Fund, has allocated $200 million to a software-oriented investment fund.
And such an approach works. In 1979, a law was adopted in the United States that allowed pension funds to invest part of their assets in start-ups. By the beginning of the 2000s, more than half of the country's venture capital comprised pension fund contributions. Many of the largest technology companies based in the USA over the past 40 years owe their success to venture capital, as well. Among them are Cisco, Google, PayPal, Uber, Apple, Dropbox, and Square.
European funds are also included in the venture capital market. Thus, according to a survey of the European Forum for Sustainable Investment, 20% of corporate European pension funds invest in innovative companies. The Swedish AP6 Pension Fund in 2017 spent 16% of its assets ($345 million) on start-ups. In 2019, two Dutch pension funds — Pensioenfonds van de Metalektro and Pensioenfonds Metaal & Techniek — invested more than $160 million in national development technology projects. And the Danish pension fund PensionDanmark in 2017 was named the best pension fund of the year in Europe precisely for the development of innovative technologies.
Can Russia go this way? Innovative companies oriented to the global market have already appeared in our country. But to scale the business, they need resources comparable to those of their competitors. In 2018, the assets of domestic NPFs were estimated at $4 trillion. If we apply the 55th investment rule in venture projects for non-state pension funds, we get $200 billion of potential investments, not so little for the Russian market.
But will it be beneficial for the NPFs themselves? I think so. They will have a new opportunity to increase their customers' income, that is, Russian pensioners. Now pension funds are forced to adhere to conservative investment strategies due to the tight regulation of this market. As a result, the portfolios of many non-state pension funds show indicators at the best level of inflation.
The government understands that it is crucial to change the rules of the game, in particular, to involve pension savings in the innovative economy. In March 2020, Russian President Vladimir Putin instructed the government and the Central Bank to work out legislative changes that would stimulate pension funds yo invest in the private equity and venture investment markets.
Yes, such investments are always associated with risk; however, like most other investment instruments. Nevertheless, professional management teams can form balanced investment portfolios that will bring profitability, even if some of the transactions do not pay off after all. That is why the average profitability of the entire venture capital industry has been around 20% per annum in foreign currency for many years.
Undoubtedly, the entry of NPFs into the venture capital market will require state control, since no one has canceled the safety of citizens' pension funds. Additional protective measures will be needed. In particular, careful selection of management teams, setting limits on venture capital investments, a multi-level asset management system through funds of funds.
There is something to try for: a modest volume of the Russian venture capital market (0.03% of GDP versus 0.3% of GDP in the leading countries) is a supplier of innovations to key areas of the economy. It can help the emergence of national champions that determine the country's place in the world division of labor. Due to the crisis, some industries at the global level have formed a request for new business models. Entire segments are freed from established leaders. A “window of opportunity” has opened wide before the Russian venture capital market — and this moment cannot be missed.
By: Alexey Basov for RBC Quote.