Being the first to do something can be difficult, especially with the weight of fiduciary responsibility always looming.
But roughly three years after two public pension funds in northern Virginia — the $4.8 billion Fairfax County Employees’ Retirement System and the $1.6 billion Fairfax County Police Officers Retirement System — became the first known asset owners to commit to a dedicated fund that invests primarily in blockchain technology firms, the results have been reaffirming.
In 2018, the employees’ fund committed $10 million and the police fund committed $11 million to the Morgan Creek Blockchain Opportunities Fund, managed by Morgan Creek Digital Assets, a subsidiary of Chapel Hill, N.C.-based Morgan Creek Capital Management LLC.
The following year, the employees fund committed $30 million and the police fund committed $22 million to Morgan Creek’s second iteration of the fund.
As of March 31, Fund I had a return on invested capital of 4.4 times and Fund II was 3.4 times, according to Mark W. Yusko, founder, CEO and CIO of Morgan Creek , and managing partner of Morgan Creek Digital Assets.
The funds, which Mr. Yusko describes as venture capital, are geared about 80% to direct investments in infrastructure involving blockchain technology and about 20% in cryptocurrencies. The first fund raised $41 million and the second raised just shy of $100 million, Mr. Yusko said.
“We were not trying to invest in bitcoin only, we were not even trying to invest in cryptocurrency only,” said Katherine Molnar, CIO of the Fairfax police fund. “What we liked about Morgan Creek is we thought of it as a multistrategy approach to this space — providing exposure to both venture capital direct equity investments as well as liquid cryptocurrency.”
But convincing her board of trustees that investing in blockchain technology and cryptocurrencies was the right decision proved challenging.
“I manage a police officers’ retirement system, and I can tell you that there were some concerns like, ‘Are we going to invest in a fund that facilitates money laundering?'”
She added, “This is a strategy that people didn’t know very much about, and if they did know anything about it, what they heard probably wasn’t particularly positive.”
So, she brought several board members and Jeff Weiler, Fairfax Country Retirement Systems’ executive director, to Chapel Hill, where the manager was based, to have their questions answered directly.
Mr. Yusko and his team fielded questions and explained the basics of blockchain technology and its potential uses during a lengthy meeting in 2018.
Viewing the commitment as an innovation allocation with strong growth potential helped the more skeptical board members come around to the idea, Ms. Molnar said.
Also, the Fairfax funds have assumed rates of return of 7.25%, which is always top of mind.
“We have real concerns about our ability to still meet 7.25% every year with just the returns from the public markets alone,” Ms. Molnar said. “We have increasingly been taking money out of public markets and into private markets.”
After some initial blowback from participant groups, Mr. Weiler posted a Q&A on the systems’ website explaining the allocations and how they were vetted.
Since then, the Fairfax funds have gotten more comfortable with blockchain and crypto funds. At its April 14 board meeting, the police fund made two $16 million commitments. The first was to Morgan Creek’s third iteration of the fund — which has been re-branded as Morgan Creek Digital Fund III — and the second was to Blockchain Capital V, managed by venture capital firm Blockchain Capital, which invests in the blockchain technology industry, Ms. Molnar said in an email.
Mr. Yusko said he expects more pension funds and other institutions to get involved in this space.
“I really believe that five years from now we’ll look back and it will be deemed fiduciarily inappropriate to have zero exposure to digital assets,” he said.
“This is an evolution of securities: we had analog securities, physical pieces of paper; then we went to electronic securities; and now we’re going to have true digital ownership where every stock, every bond, every commodity, every piece of real estate, every everything is going to be digitized and will trade in this 24/7 global marketplace.”
