Captive Funds Explained: A Guide for Investors

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Key Takeaways

  • A captive fund is a private pooled investment managed for a select group tied to a single organization, benefiting its members or employees.
  • These funds are not publicly traded, and investments can only be sold back to the fund, limiting liquidity and transferability.
  • Corporations use captive funds to target specific investments such as venture capital assets in private markets.
  • Captive funds provide organizations a structured way to offer investment opportunities to employees or to engage in corporate strategic investments.

What Is a Captive Fund?

A captive fund is a private investment pool designed for a specific group, such as company employees or organization members. These funds restrict investment to a select membership, and shares can only be bought or sold within the fund, ensuring exclusivity and tailored investment strategies. Captive funds cater to specific investment goals, whether as employee benefits or targeted venture capital projects, and operate with less regulatory oversight compared to public offerings.

Understanding Captive Funds and Their Impact

Captive funds are not publicly offered or traded on exchanges. Therefore, they typically do not get a lot of media attention. However, these funds can be created with a broad range of objectives, many of which can be quite similar to publicly traded funds. Captive funds are often developed as an employee benefit allowing for investment from some or all of the company’s employees depending on its benefit focus and structure. Captive funds can also be used for managing venture capital investments.

What makes these funds “captive” is the inability to sell fund shares to anybody else but back to the fund itself. In other words, investors in the fund cannot sell or transfer their holdings to any other individual or entity outside of the fund’s boundaries. Often these boundaries are limited by certain members of an organization or firm.

Captive funds can be managed internally by designated trustees, or they can also be managed by an institutional investment manager. As non-registered private funds, captive funds have broad latitude in their structuring and investment objectives and are subject to less regulatory oversight.

Captive Funds for Employees: How They Work

Captive funds for employees seek to broaden the employee benefits at a company. Captive funds can be similar to Z-share funds, which are typically used by mutual fund companies allowing employees to invest in a single share class of the portfolio. The Medallion Fund for Renaissance Technologies employees is one example of an employee captive fund.

The Medallion Fund is a legendary capital fund invested in by the employees of Renaissance Technologies. Founded by James Simmons, Renaissance Technologies is a hedge fund focused on quantitative investing. The company has 290 employees with $84 billion in assets under management as of 2018, including the Medallion Fund. Other funds include the Institutional Equities Fund and Institutional Diversified Alpha Fund. The Medallion Fund uses its own proprietary quantitative investing strategy for the Fund and is well known for maintaining one of the best track records for returns in investing history.

Venture Capital and Captive Investment Funds

Many companies establish captive funds to build partnerships and make private market venture capital investments. Funds are usually supported by corporate capital and can be managed and structured in various ways.

Alphabet, Inc., has a captive fund portfolio managed by Google Ventures. Google Ventures is a subsidiary of Alphabet, Inc., focused primarily on managing a broad investment portfolio that seeks to invest in growing technology companies.

Healthcare is another sector that is involved with venture capital funding and research. Healthcare companies with captive funds for venture capital investing include Eli Lilly and Company, Takeda Pharmaceutical Company, Biogen, and Ascension Health.