VC returns hit 30-year low

Two new reports highlight the difficulties facing VC and buyout firms and their investors.

Venture Economics, a US-based economic research organisation, has published figures showing that returns on venture capital investment have fallen to their lowest levels since 1969.

In the 12 months to September 30 2001, one-year returns for all private equity, including venture capital, buyouts and mezzanine funds, showed a performance of -21.4%. However this compares favourably with one-year, public market returns of -64.4% on the NASDAQ and -31.4% on the S&P. One-year returns for venture capital funds also continue to decline, falling from -18.2% at the end of Q2 2001 to -32.4% at the end of Q3 2001.  

The Q3 figures represent the worst performance by VC investment since 1969, the first year in which Venture Economics collected data. It is thought likely that the figures for Q4 2001 will be as depressed, if not worse, than those published for the first three quarters.

Mark Heesen, president of the US National Venture Capital Association, described 2001 as ‘very difficult’, but added that he sensed a fair degree of optimism for 2002. “The combination of significant market volatility, declining valuations and much uncertainty forced venture capitalists to rethink investment strategies and return to investing fundamentals. We are now beginning to sense some optimism among the venture community, which will hopefully translate into better performance figures in the future.'

Meanwhile 2001 figures for buy-out fundraising and deal volume appear to be equally depressed.

Buyouts, a private equity newsletter, has published data for 2001 showing that buy-out firms' fundraising fell from $63bn in 2000 to $35.4bn last year, while the volume of deals completed fell from $41bn in 2000 to $23bn, the lowest total since 1995.

The year was typified by funds struggling to achieve their closing targets. Hicks Muse Tate & Furst for example did not come close to achieving the original $4.6bn target for its latest buyout fund. Eventually, the fund closed early in 2002 at $1.6bn.