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Lack of exits keeps short-term performance figures depressed

Despite a slight improvement in the one-year performance figures, short-term US private equity returns remain negative due to the continuing absence of profitable exit opportunities.

US private equity performance figures for Q1 2002 highlight the ongoing difficulties facing private equity and venture capital funds in achieving returns on their investments.

The data, published by Venture Economics and the National Venture Capital Association, shows that one-year performance across all sectors remains negative. Early-stage and seed investment funds continue to show the largest negative one-year returns (-31.8 per cent). The broader venture capital fund performance was slightly up on the previous quarter at -24.4 per cent (-27.8 per cent).

The lack of exit opportunities has had a lesser impact on private equity funds, although the one-year figure remains negative at -14.6 per cent. Arguably the greatest cause for alarm among investors will be the buyout performance data, which shows that the one-year return of -10.7 per cent has impacted on the three-year figure which at -0.6 per cent is the only category to return a negative performance over a three year period.

It is still difficult to gauge the affect poor short-term performance will have on longer-term returns, which have continued to outperform the public markets. Private equity and venture capital funds have still returned an average of 16.6 per cent and 25.9 per cent respectively over ten years. However, the drop in valuations, continued volatility in the public markets and a lack of exit opportunities could mean that returns may remain in the doldrums for some time to come.

“VCs have a lot of good companies ready to exit, but the downward pressure on valuations continue to degrade short term performance,” says NVCA vice-president Jesse Reyes. “The industry needs exits to realise returns to their investors.”