Alex Lykken May 12, 2014
U.S.-based VC firms are holding their own. Through 3Q 2013, net cash flows from VC firms back to LPs was positive at $6.2 billion. Given the relatively strong fourth quarter for VC capital exited, 2013 will likely end up in positive territory and perhaps double the net cash flow recorded in 2012 ($3.4 billion). That would mark the first back-to-back positive performance for VC net cash flows since the dot-com era. Only one other year since 2001 was in the black (2003). On a global basis, we found that VC funds have underperformed their public-market equivalent for several consecutive years. PitchBook’s VC KS PME Benchmark, which compares global VC fund performance to the Russell 2000® Growth Index, shows underperformance for every vintage year between 2001 and 2011, sometimes by significant margins. 2004 was particularly brutal—the 0.767 value for 2004 vintage funds means that investments in a typical vehicle from that year would be 76.7% the value of what they would be if they had been invested in the public markets instead.
That said, not all VC funds have performed poorly. Top-quartile hurdle rates continue to climb; for 2011 vintages, the mark is 21.6%, a good jump from 17.7% in 2010 and 10.0% in 2006. For several years, the bottom quartile hurdle rate rose in tandem, but the disparity between the best- and worst-performing funds began to diverge again beginning with the 2010 vintage. The difference between backing a top- or bottom-quartile fund in the 2011 vintage is 22.4 percentage points, the biggest gap in at least 10 years.
There’s also a disparity between the performance of larger VC funds and their smaller counterparts. Across the one-, three- and 10-year horizons, IRRs for VC funds of at least $500 million are handily outpacing all other size buckets. Smaller funds make up some ground as time goes on, but at the 10-year mark, $500 million+ funds still outpace the little guys at a 4.1% IRR, pulling the median horizon IRR for all VC funds up to 3%. Funds smaller than $100 million have tread water around the 0% mark over the years. It’ll be interesting to see how smaller funds perform in the coming quarters and years, given the surge in micro-funds (less than $50 million) that closed in 2013.
PitchBook’s 2Q 2014 PE & VC Benchmarking report details several other fund performance metrics, including a PME case study on healthcare-focused PE fund performance versus the Russell 3000 Healthcare Index. In-depth sections on real estate and secondaries fund returns are also included, as are several pages detailing IRRs, return multiples, quartiles and cash flows for PE and VC funds across several vintages. We’ve also tracked down select top funds by IRR across geography, strategy, vintages and size buckets.
*Net cash flow figures are through 9/30/13. GPs have 120 days to report to LPs, which creates a multi-quarter lag when compiling fund performances.
Featured image courtesy of Wikimedia user Grzegorz Jereczek