US private equity IRRs trails venture in Q308

Both the US private equity and venture capital industries achieved negative IRRs for the quarter ending 30 September 2008, but venture capital outperformed private equity with the lesser of the two negative results.

The US private equity and venture capital industries took a hit in the third quarter of 2008, according to the Cambridge Associates’ quarterly performance indices.

Venture capital funds produced a negative 2.8 percent return while private equity funds had a negative 8 percent return on investment. This is only the second time that private equity returns have fallen behind those of venture capital in the last five years.

The research is based on data from 740 US private equity funds and 1,221 US venture capital funds. Both include fully liquidated partnerships formed between 1986 and 2007. The researcher defines “returns” as net fees, expenses and carried interest.

Across both venture and private equity, funds invested in manufacturing performed the best and electronics the worst, the report said. Information technology, healthcare and software deals made up most of the venture capital returns for the third quarter last year.

“Due to the increasingly difficult economic environment venture capital managers spent more time in the third quarter shoring up their existing portfolio companies than they did looking for new ones,” the report said.
Over the past five years, the annual mean returns for private equity have outperformed venture capital, with a mean return of 19 percent compared to venture capital’s 11 percent for the same period. Venture capital's most dramatic decline in the long term occured in 2001 and 2002 following the bursting of the dotcom bubble accounts for the more than 38 percent drop in returns in the short term. However overall in the past 10 years venture capital achieved a mean return of 40 percent compared to just 11 percent for private equity.