Investing in Bitcoin Is Like a Venture Capital Play, Virginia Pension Chiefs Say

Gaining exposure to cryptocurrency and blockchain technologies can be part of an overall venture capital (VC) play, rather than a direct investment strategy into a single asset, according to two public pension fund investment chiefs from Virginia’s Fairfax County.

The strategy has performed well for the investors, who have gained exposure to cryptocurrencies such as Bitcoin through investments in several private equity funds. The two allocators were quick to point out that they are investing in the underlying technology, rather than placing bets on which cryptocurrencies will rise to the top.

“It was more just looking at it from the technology and innovation perspective,” said Andy Spellar, investment chief at the Fairfax County Employees’ Retirement System.

He, and his colleague Katherine Molnar, CIO at the Fairfax County Police Officers Retirement System, shared their insights Wednesday during a panel at the 2021 Virtual Chief Investment Officer Symposium. The event was moderated by Chief Investment Officer Managing Editor Christine Giordano.

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Both investors said they are “very happy” with their investments. Several years ago, the pair invested in the Morgan Creek Blockchain Opportunities Fund I, a private equity vehicle that raised $17.1 million from investors in 2018. The fund now is up “between 3.5 to 4.5 multiples of domestic capital,” according to Molnar.

That was enough to get the pair to re-up into the same asset manager’s Fund II a year later. CIO Molnar went a step further than Spellar by doubling her police fund’s target in Fund II to 1%, up from 50 basis points (bps) in Fund I.

Other firms the two investors have gained exposure to? Coinbase, which recently had its initial public offering (IPO), and a blockchain firm for loans and mortgages called Figure, as well as a bank for cryptocurrencies known as BlockFi.

Molnar’s county police retirement system also put another 1% of assets into a separate fund manager called Blockchain Capital for its Fund V, which has a combination of venture capital investments and some liquid cryptocurrency. The pension fund now has 2% of its assets allocated to the space, up from 50 bps in 2018.

The investment chief said she could see the allocation growing even higher. Thus far this year, the extra blockchain exposure has helped Molnar outperform her colleague Spellar’s employees’ retirement system “just by a hair.”

“It has everything to do with the fact that I sized our blockchain exposure larger than he did on a relative basis,” said Molnar.

“She killed me,” Spellar said.

The peers have maintained similar asset allocations, preferring risk allocations to capital allocations, meaning the funds have had less equity risk over the years. Generally speaking, this means the two pension funds have lagged behind their peers during market rallies, but have performed better during downturns. In the two-year period following the financial crisis, the funds were the top public funds in the nation.

Going forward, the asset owners said they will continue to invest in managers that deal with both cryptocurrency and venture capital, rather than investing in each asset class separately. “We quite like that combination, and tend to think of it as almost like a multi-strategy approach,” Molnar said.

Spellar and Molnar expect it’s “prudent” to start developing relationships with other asset managers that deploy similar strategies as Morgan Creek.

The two peers work within a county retirement structure made of three systems, including the Fairfax County Uniformed Retirement System. That set-up has helped them pool their assets—nearly $5 billion in the county employees plan and $1.7 billion in assets in the county police plan—to negotiate better fees from managers. The two have a 7.25% target to meet.

“When we are speaking to a manager, we’ll negotiate capacity on behalf of all three systems. We’ll negotiate fees, you know, especially at tiered fee structure,” Molnar said. “So it does give us some leverage.”

Working together has also helped the two allocators communicate the investment to their trustees, who were skeptical when they were first considering it in 2018, as the funds were exploring their first investment with Morgan Creek. At the time, Bitcoin and other cryptocurrencies were unproven investments and not considered appropriate for public pension funds.

The two allocators allayed concerns by inviting trustees from all three pension systems along to their meetings with the manager. By the time the investment chiefs introduced the fund manager at board meetings, the trustees had sat through the same presentations directly from the asset manager. “I think that went a long way,” Spellar said.

“Our skill sets are very complementary. So you tend to just end up working on a lot of things together approaching portfolio construction and manager selection,” Spellar said.

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Tags: Bitcoin, Blockchain, CME, Cryptocurrency, Fairfax County, Pension Funds, Volatility

The craze for the blank check outfits might have dwindled, due to the SEC, but they’re still a good investing choice, our symposium panelists say.

SPACs have gotten spanked lately, with the Securities and Exchange Commission (SEC) warning about them and the once-energetic crowd of new ones shrinking.

But the slowing of the craze over special purpose acquisition companies (SPACs) is a good thing because it allows investors to better evaluate them, culling out the best, according to a panel on the subject at CIO’s 2021 Symposium on Wednesday.

“SPACs are here to stay, although at a lower volume,” said Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, who termed the reduction in SPAC issuance a “healthy” development.

SPACs are shell companies that come to life via initial public offerings (IPOs). With the IPO capital in hand, they go on to buy out a functioning business over the next two years. Also known as blank check companies, these vehicles offer quicker paths to go public. The SEC last month admonished investors that SPACs shouldn’t be making such optimistic projections, which the agency said could be misleading.

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While the SEC and other SPAC critics have highlighted the organizations’ flaws, the panelists pointed out that investors stand a decent chance of making good money on them going forward. Jonathan Glidden, CIO at Delta Air Lines, which has invested in them, noted that SPAC investors have a voice on what acquisition target is chosen, with the ability to vote yes or no.

If a SPAC can’t find a suitable target, then investors get their money back, since it’s in a trust and can’t be touched, Glidden said.

The Delta investment chief described a strategy on how investors can cash out of their SPAC positions after the IPO. People who participate in a SPAC at IPO, usually for $10 per share, also receive a fraction of a warrant for each share owned. As warrants are tradeable, an investor could unload the warrant, usually for 50 cents to $1 each while holding on to the equity. The investor can then sell the equity if there is a price pop once a deal is announced, or cash out and get the $10 back once the deal is approved. Glidden uses the strategy as part of a portable alpha program, but also described such moves as “synthetic fixed income.”

Furthermore, Temple said, SPACs have the virtue of price certainty: They go public at $10 per share. Conventional IPO pricing can waiver wildly pre-offering. Plus, the capital raised in the IPO, along with side financing known as a PIPE, or a private investment in public equity, can pay down the acquired business’ debt, he noted.

“The air’s now out of the balloon,” the Lazard executive said. “What that means is that better companies will go public.”

One steady source of SPAC and IPO targets, of course, is venture capital (VC). Panelist Jason Klein, CIO of Memorial Sloan Kettering Cancer Center, detailed how exacting VC operators are in vetting possible recipients of their money. They make sure that the leadership of startups really knows their stuff, Klein said, “and just aren’t borrowing ideas they heard at cocktail parties.”

Late-stage VC funding, when a fledgling company is well on its way, benefits from “the enthusiasm of investors who want disruption,” he said. Such innovative new companies tend to be in tech or health care, which makes for an imbalance, he observed.

SPACs have been around for decades, yet only recently came to the fore. Especially prior to the recent surge, they “are different from what they were 20 years ago,” said the panel’s moderator, Tim Recker of the James Irvine Foundation.

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Tags: initial public offering, IPOs, PIPEs, private investment in public equity, SEC, SPAC, special purpose acquisition companies, VC, Venture Capital