Independent Thinking^®

Q&A with Accolade Partners on Private Growth Equity and Venture Capital

Editor’s note: Evercore Wealth Management supplements its core investment capabilities with carefully selected outside funds across the range of the firm’s asset classes. Here we discuss opportunities in venture capital with Joelle Kayden, founder and managing member of Accolade Partners. Accolade is a venture capital and growth equity fund of funds, concentrating on the technology and health sectors. Please note that this represents the views of Accolade and not necessarily the views of Evercore Wealth Management.
 
Q: What would you say to investors who are concerned that they missed the big years in the venture capital, or VC, markets?
 
A: First of all, venture capital is a long-cycled asset class. It typically takes a fund around three years to invest in a portfolio of companies. Assuming a company is successful, it can take seven to ten years for an outlier return to be realized. You can’t time the market, which means that investors should be consistent in allocating to venture if that fits with their risk/return parameters.
 
Second, I could repeat a commonly heard phrase, which is that today “every company is a technology company.” Or, as Marc Andreessen says, “Software is eating the world.” It is clear that the pace of change driven by technology is accelerating and impacts all industries and geographies. The opportunity set today is larger than it has ever been.
 
Q: Accolade has a strong record of outperformance. Please describe your investment approach and the way you work with the funds in which you invest.
 
A: Accolade’s investment process is deliberate and clear. We have the luxury of focusing on venture capital and growth managers in software and healthcare. We invest with conviction and build portfolios that are concentrated in our best managers. We work hard to be a value-added partner with our managers. Where appropriate, we make introductions to prospective investors, customers and even employee candidates. We are considered a trusted advisor, valued for our candor and willingness to help.
 
Q: What characteristics stand out to you when deciding to invest with a manager, especially those with new or emerging funds?
 
A: We conduct extensive due diligence on our existing managers as well as new managers. For Accolade, this is an ongoing process, and is not just initiated in connection with a fund raise. We ask questions like: “How hungry is this manager?” “What is unique about how this manager sources investment opportunities?” “How do you think about portfolio construction?” and “What is your firm culture?” Then there are the obvious ones like: “What is the track record, and do we believe that it is replicable?” As Accolade is a portfolio, we also want to add managers who are accretive to the portfolio, so oftentimes it is in an area where we want additional exposure, like biotechnology, or a geography, like Los Angeles. Many new or emerging managers are individuals we have gotten to know over time or have been associated with previously. In addition, we want managers who are coachable and good listeners.
 
Q: How do you view VC valuations at present? Where are you finding opportunity?
 
A: Accolade’s fund managers invest at the earliest stages of company formation. We have made a deliberate decision to focus our investments there. We believe that this is the most attractive area on a risk/return basis. We think that valuations – most notably at the later stages – are frothy, as there is a lot of capital looking for a home. That is also where returns can be compressed if valuations correct in the public market.
 
Q: Accolade’s fund-of-fund strategy has lots of flexibility but isn’t entirely unconstrained. Tell us about some of Accolade’s constraints (tech vs. healthcare, growth vs. early stage, vintage year, etc.) and why you thought those constraints were important.
 
A: Accolade is a disciplined investor. In addition to wanting to have concentrated portfolios of around 15 managers, we have invested consistently in software (75%) and healthcare (25%) in both venture managers and growth equity managers. We also have vintage-year diversification and like our managers to invest consistently throughout their respective investment periods. We invest exclusively in U.S.-based managers, not because we don’t think other geographies are attractive, but because we can spend 100% of our time digging deep into one market where we have a distinctive edge and opportunity to identify and access the best managers.
 
Q: Transparency is a critical consideration in investing. How do you assess fees charged by funds you’re investing in?
 
A: The fee structure of our underlying managers is pretty straightforward. We prefer funds that have a European waterfall, where managers have to return the whole fund before getting carry, so our interests our aligned. [Editor’s note: The distribution waterfall is the order in which a private equity fund makes distributions to limited and general partners. The European waterfall, or global waterfall, means that the hurdle threshold is calculated at fund level. The American waterfall, or deal-by-deal waterfall, calculates the hurdle thresholds for each deal.]
 
Q: VC is a long-term investment, sometimes more than seven to ten years. Over that time, economic cycles can change significantly. How do you invest throughout the cycle? What sort of assumptions do you make about economic growth and/or recovery when evaluating opportunities?
 
A: We need to rely on our managers to be disciplined, both in what they pay when investing in a company but, equally important, in knowing when to sell. Our managers usually underwrite a return based on the same multiple at exit that they paid at entry, which means that companies have to grow to achieve a good rate of return. Although the economy matters, technology and healthcare companies have demonstrated that they can grow in periods of modest economic growth. In weaker economic times, exit multiples are constrained, but with patience, companies with strong fundamentals can manage through that.
 
Q: You and other Accolade partners invest significant amounts of personal capital alongside your investors. How does that shape your investment focus and your tolerance for risk?
 
A: We love investing in Accolade, as it is what we know best. Technology and healthcare are two great sectors in which to invest. The great opportunities today are in the private and not public markets, so this is the best way to access growth.
 
For further information about Accolade Partners and about other funds on the Evercore Wealth Management investment platform, please contact Stephanie Hackett at [email protected].