Of all the problems that have besieged venture capital in recent years, arguably none is more acute than investors’ difficulties converting their paper returns into cash.
Limited partners are disappointed with how much capital is coming back to them from their venture managers. And they’re less inclined to re-up with VCs that haven’t returned much cash. LPs are closely monitoring a metric called distributed to paid-in capital (DPI), which measures how much capital a manager returned relative to what was invested.
But just how small are recent cash distributions compared to historical levels?
In 2023, distributions to LPs as a percentage of mature funds’ net asset values fell to the lowest point in nearly 14 years, according to PitchBook data.
“At times like this, LPs reward track records with DPI and a lot of history,” said Laura Thompson, a partner at Sapphire Partners.
LPs need those cash distributions to recycle them into new VC funds. Until a significant number of IPOs and liquidity starts flowing back to LPs, funds with low distributions will struggle to raise money.
There are some signs that the IPO market will open up soon, but it’s unclear if 2024 will be a robust year for new offerings.
“We are finally starting to see IPO pitches,” said Ron Eliasek, chair of TMT investment banking at Jefferies. “The companies that were planning to go public, I think will be [going] in the back half of this year and certainly next year.”
If those listings happen, they should help lift VC distributions. But until then, VCs with low DPI will try to offload their stakes in the secondary market.
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