Why One LP Does Not Want to Invest in New VC Funds

• The Fairfax County Employees’ Retirement System plans to focus on funds it previously invested in.
• The pension fund may refrain from investing in new funds as they expect VC returns to slow.
• Despite the market outlook, it plans to continue investing in blockchain, AI and life sciences. 

Some limited partners are now considering how to manage their cash and allocations, potentially leaving newer, less established venture capital firms on the back burner as funding continues to slide into territory not seen since early 2020.  

Andrew Spellar, chief investment officer at Virginia’s Fairfax County Employee’s Retirement System, said he still holds some optimism in the market, but they will be more cautious about where to put cash. 

“If there are any reups, we’re more likely to go with current funds and less on new funds,” Spellar said. “We’re going to want less exposure to risky assets and double down on areas in which we feel more secure.”

Spellar noted that performance reports from the funds they’ve invested in have been “positive to flattish” from the first quarter, but he predicts reports expected to arrive in June to tell a far different story. Spellar said the next reports could show some losses, which will impact how they invest in the near term. 

Layoffs and plummeting stock prices prompted many to start bracing for a large investing pullback  into the tech sector. 

But, according to Spellar, the pension fund was able to shield itself from much of the declines by investing a lot in real assets such as commodities, so any potential losses from the public market and private investments have not hurt the fund thus far. 

Spellar said the fund had strong growth, particularly in its innovation theme or in funds that made investments in artificial intelligence, life sciences, cybersecurity, and blockchain.

While the pension fund still expects these areas to grow, it may not do more investing anytime soon.

“We’re pretty full in terms of allocations on that theme, so for now, we don’t expect new allocations around it,” he said. “Last year, we had good returns for blockchain and even life sciences have been good.”

Fairfax County has been investing in technologies like blockchain since 2018. It committed $10 million to the Morgan Creek Blockchain Opportunities Fund. Spellar said it has since invested in funds run by VC firms Blockchain Capital and Polychain. The county said its investments in blockchain focus mainly on blockchain technology companies, with no more than 15% going to tokens and cryptocurrencies. 

As part of its commitment to blockchain and crypto, Fairfax County plans to seek approval from its board to invest in funds using yield farming strategies. As reported by Bloomberg, the Fairfax County Employees’ Retirement System and the Fairfax County Police Officers’ Retirement System want to invest in two funds that could yield at least 9%. Bloomberg said both pension funds have invested at least $50 million into Parataxis Capital Management; an investment firm focused on digital tokens and cryptocurrencies. 

Of course, Spellar said, all of this depends on how crypto markets perform. Crypto prices have plunged in recent days, and one of the most hyped cryptocurrencies–Luna and the stablecoin TerraUSD crashed–losing nearly 90% of their value.