For years, venture funds have posted the highest returns of any alternative asset class—handily besting private equity, real estate, private debt and real assets. Now that run is being threatened by a radical repricing of fast-growing companies with little or no profits.

In Q1, more than 68% of venture funds suffered a drop in total realized and unrealized returns versus capital invested, according to a recent PitchBook analyst note on VC fund performance

Of those funds, the median decline is 3.5% from 2021's peak in terms of TVPI, the ratio of the fund's current value and distributions to the amount paid into the fund to date. That decline is surpassed only by the downturns during the global financial crisis, at 7.8%, and the dot-com crash, at 15.7%.

"This year we have seen a spike in the cost of money, represented by rapidly rising interest rates," said Zane Carmean, a quantitative research analyst at PitchBook.

Applying the same metrics to other fund asset classes, real assets and real estate have thus far been insulated from meaningful markdowns and have even shown net positive results as of Q1. The opportunity cost of investing in VC versus safer cash-flow-positive investments is, therefore, higher now than it was last year.

With over $1.4 trillion in unrealized value sitting in VC funds, a sustained drop in valuation multiples could result in billions of dollars in value wiped away from LP portfolios.

"Higher interest rates impact longer duration asset classes disproportionately because the higher discount rates are applied to longer dated, hard-to-predict future cash flows," said Carmean.

The IPO market has dried up over the past six months and is likely to lengthen hold times both in terms of exit value to be expected and timeline to exit. Carmean said that a lower exit environment may result in lower returns and lower distributions, leading LPs to pull back on VC investments in future.

Related read: PitchBook Analyst Note: Did VC Fly Too Close to the Sun?

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