VC shows modest returns in Q1

Shorter-term venture performance showed signs of improvement in the quarter ending 31 March, according to recent statistics from Cambridge Associates and the National Venture Capital Association, but performance is still down on the decade.

While a jump in initial public offerings and a record number of merger and acquisitions helped boost venture returns slightly in the first quarter, the industry still appears to be stuck in a 'lost decade'.   

Despite the modest increase in short-term gains, performance over the past ten years continued to decline, according to the Cambridge Associates US Venture Capital Index, the performance benchmark of the National Venture Capital Association.

NVCA revealed venture capital grew by a modest .7 percent in the first quarter, compared to 3.3 percent in the prior quarter. Growth has slowed between the quarters, but venture performance is still up from the first quarter of 2009, when performance stood at -2.8 percent. Over 10 years, venture is returning -3.7 percent.

“An improving exit market translates into distributions back to limited partners, a dynamic the venture industry as a whole has not enjoyed since the financial crisis began in 2008,” said NVCA president Mark Heesen in a statement. Heesen added, however, that the industry will still need “several quarters of healthy and viable IPOs and M&As” before it can return to historical levels.

Reduced LP appetite for venture capital has been driven by both disappointing 10-year returns, which continue to decline, as well as a heightened sensitivity to illiquidity, according Peter Mooradian, managing director of VC research at Cambridge Associates.

“Given what happened in 2008, folks are more leery in terms of making commitments,” Mooradian told PEO. “That sensitivity has lessened a bit, but it is still part of the equation. I’d say that appetite is slowly improving.”

Mooradian said in a statement he expects declining 10-year returns to bottom-out in the mid-negative single digits over the next two quarters, and return to breakeven or modestly positive figures in the second half of 2011.

“What will really change things [will be] to see sustained improvement in the number and level of exits, both IPO and M&A,” he said. “If we can see that continue for several quarters, then you might see appetite change more meaningfully.”

Cambridge Associates statistics on vintage year multiples show that 1995 vintage year funds returned 6.13x the cash committed by LPs, the most positive ratio in the past 15 years.  As of 31 March, Cambridge’s database is comprised of 1,294 venture funds formed between 1981 and 2009.