Venture Capital Funds provide capital for private companies. Typically 5 to 7 percent of a pension fund money is invested in what is known as “alternative investments”. Pension fund managers expect higher rates of return from these alternative asset investments, and they understand there is a higher risk associated with such investments.

Venture Capital funds are such an alternative investment that seeks to provide high rates of return to its investors. Most venture capital funds are set up as independent limited partnerships. The venture capital firm acts as the general partner with third-party institutions investing the bulk of the capital to the fund, filling the role of limited partner. During the fundraising phase that every venture firm goes through in building a new fund, the general partner seeks out investment commitments from accredited investors.

Funds generally raise anywhere from £5 million to several billion pounds from their limited partners. As a rule of thumb half of the venture capital for the fund comes from pension funds, with the balance coming from endowments, foundations, insurance companies, banks and affluent individuals.

The general partners job is to invest the capital in privately held, high-growth companies. The returns of the venture capital fund is distributed back to the limited partners as dictated by the partnership agreement, but normally lean toward the latter years of the fund. The limited partners are then generally stuck with this group of venture professionals for the duration of the partnership (Usually ten years). Liquidity is realised when a viable exit option becomes available (such as Initial Public Offering (IPO) or merger and acquisition).