The quarterly performance of venture capitalists big and small doesn’t say a whole lot about funds with decade-long life spans.
Even so, there’s a three-month sliver of welcome good news for VCs and their LPs, who collectively stumbled their decidedly unmerry way through 2023.
Venture fund performance finished the fourth quarter of 2023 in the black for the first time since 2021, according to fresh PitchBook data. The showing comes in tandem with a lift for alternatives broadly, with buyout funds, PE growth, secondaries and infrastructure all recording solid performance.
VC funds eked out a 0.4% return in Q4 2023, leaving the asset class with a 13% 10-year horizon IRR.
VC finished both 2020 and 2021 as the top-performing private capital strategy (in terms of annual pooled IRR) as LPs flooded funds during the low-rate pandemic era.
Market forces pumped the brakes in 2022 before nearing a screeching halt in 2023: Global exit value last year was about $225 billion—significantly less than half of 2021’s total.
VC recovery tied to Fed’s rates move
Long-anticipated rate cuts by the Federal Reserve are primed to render dealmaking more attractive.
The anticipated slash would give corporates reason enough to “leave the sidelines,” PitchBook analysts said, considering capital costs would decrease. And declining rates ought to bolster currently depressed multiples, and ensuing valuations, for venture-backed companies.
Valuations have weighed in lighter of late. Still, more than 60% of LPs surveyed by PitchBook said portfolio valuations are overheated, with a majority of VCs dubbing their worth “fairly valued.”
“This multiple expansion will help the public market accommodate high private valuations, so more companies will be able to exit via IPO without needing to take a down round, which increases public listings and investor interest in VC,” PitchBook analysts wrote in the report.
Lackluster liquidity has been particularly painful for stalled IPO hopefuls, considering the tech-heavy Nasdaq soared 43% last year.
An uptick in secondaries changing hands has stepped in to fill the dry powder void, but the secondary market alone can’t provide IPO returns.
There’s an evident disparity between the VC-backed haves and have-nots. And the outlook for fresh inflows isn’t sunny.
“While strong startups have the luxury of waiting for a friendlier exit environment, lower-conviction companies approaching the end of their cash runway have been accepting small M&A deals that provide investors little to no payout beyond invested capital,” the analysts wrote.
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