Firms in Europe are looking at ways of taking advantage of the appetite for venture capital, by making the asset class accessible to retail investors. The task is being handled by derivative structuring desks because it follows on from evolutions in tax wrapping and capital protecting hedge funds, even though venture capital funds have much greater valuation and liquidity constraints than hedge funds.
"This is hot right now," said one structurer, who said he has fielded several requests for venture capital access products, most from investors already comfortable with hedge fund-linked products. Officials at Barclays Capital, Lehman Brothers and The Royal Bank of Scotland said they had received inquiries from investors about accessing venture capital through structured investments.
ABN AMRO is already at work on a deal. An official at the Dutch house declined to detail how it will be structured, but said the firm is working to create a structure with capital protection. Rivals noted this is difficult with venture capital because methods such as constant proportion portfolio insurance, or writing an option on the underlying fund, require significant liquidity and transparency which venture capital funds do not have. The ABN official said the demand for the structured investments is coming from high-net-worth clients in Europe and also from Japanese institutions.
There are a range of other structures officials at other firms say they will be looking at. The most simple, so-called delta one structures, will consist of structuring desks issuing low-denominated certificates linked to the venture capital fund, which will pool investment into the fund. One official noted there could be certain tax wraps added to these certificates to suit different investors. Another possibility is to structure a stock basket product, linked to listed equity firms such as 3i, or to securitize private equity funding.