Annual returns were in the red for all seven venture capital fund types, as the group was down 11% for the year. The drop off is due in large part to the continued decline of high technology company valuations and the lack of exit opportunities , according to the year-end 2002 Private Equity Performance Index results released by Thomson Venture Economics and the National Venture Capital Association.
Leading the decline this year was Early/Seed funds, down 27.6%; followed by Balanced and Later Stage funds, 22.8% and 15.7% lower, respectively. The remaining funds, whose returns are derived from distributions back to investors and interim valuations, were:
- All Venture down 23.3%
- All Buyouts down 5.5%
- Mezzanine down 1.7%
However, this performance must be taken in context that the overall equity markets have all been adversely impacted. Private equity performance has outpaced NASDAQ, which is the venture industry’s most relevant public market benchmark.
“The two and a half year downturn in venture and private equity returns are not surprising, given what has been going on in the public markets. The inevitable winnowing process that this will create will ultimately leave a much leaner but probably more robust investment market for private equity investing,” according to Jesse Reyes, Vice President at Thomson Venture Economics.
Generally venture funds are expected to generate 15% to 20% returns over the life of the fund. However, the venture capital industry is in a state of flux with falling portfolio company valuations and limited exit opportunities as seen when early performance of recent funds are compared to early performance of earlier vintage year funds. For example, after three years of activity, 1996 vintage year funds had returned 1.12 times the original investment to the investors. In addition, companies remaining in the portfolios had a remaining combined valuation of 3.92 times the original investment. The consensus across the industry is that the 1996 vintage year funds as a group exceeded all expectations.
In contrast to the 1996 vintage year funds the younger funds of today are challenged. The vintage year 1998 funds have returned $0.83 cents on the original investment dollar and the remaining portfolio companies have a valuation of $0.93 cents on the dollar at the three-year mark. The vintage year 1999 funds have returned 20 cents on the original investment dollar with remaining portfolio companies having a valuation of 43 cents on the dollar at the three-year mark.