The traditional 2/20 fee structure and the trend of ever-larger fund sizes have created a misalignment of interests. For mega-funds, the management fees provide enormous, risk-free wealth to GPs, potentially reducing the incentive to drive for the high-risk, high-return outcomes that LPs require.
The analysis demonstrates that as fund sizes swell into the multi-billions, the math required to 'return the fund' becomes daunting. A $7B fund needs multiple $50B+ IPOs to generate a meaningful return, an outcome that is historically rare, making top-tier performance statistically improbable.
Contrary to popular belief, venture capital as an asset class does not guarantee superior returns. Data shows that only top-decile managers consistently outperform public market equivalents, while median returns (around 8% IRR) are underwhelming given the illiquidity, long time horizons, and high risk involved.
The discussion highlights firms like Index Ventures and Union Square Ventures as exemplars of discipline. This includes resisting the temptation to excessively scale fund sizes, maintaining a performance-driven culture, and having a clear, repeatable protocol for selling positions to realize gains.
A confluence of factors is expected to create a significant liquidity event around 2026. These include a backlog of mature, venture-backed companies, a potential reopening of the IPO market, and the massive cash reserves of tech giants like Google and Microsoft, which could fuel a wave of strategic M&A.
Keep pulling the thread on Miles Dieffenbach.