This is an investment fund which invests in a number of businesses which are small, and which are not (yet) quoted on any stock exchange. Many start-up companies can have excellent business ideas, but they need funds to get the business up and running, firstly, and then to expand it later. If you ‘get in on the ground floor’, in terms of investing at an early stage, these companies can be very profitable and they can be very good investments. But while investment managers have the funds to invest in these businesses, they rarely, if ever, have either the skills or the time to work with these small companies and make a success of them. And of course the risks of investing in these very small companies are far larger than the risk of investing in large, blue-chip companies, as quite a few start-up companies may well end up going bust.
The way around this has been to set up ‘venture capital funds’, which invest in a number of these small companies, using funds given to them by the large investment managers. The managers of these funds will generally have a lot of experience in assessing the prospects for small companies with (potentially) good ideas, and will also be able to work with the companies, advising them on the best strategy they can follow for success. They will know that many of the companies that they invest in will fail, but expect that those that do succeed are likely to make them a lot of money!
In a sense, everyone gains. The pension fund and the investment manager invest in potentially a very lucrative set of investments with a reduced risk and as little inconvenience as possible, while the small companies get the cash that they need, as well as expert advice on how to succeed.