There is still no reason to panic more about the performance of venture capital funds
Over the last year, the venture capital industry has had a tough time. Many feared that the bull market had driven valuations to unsustainable levels and would lead to initial short rounds and cash burns, negatively impacting VC fund performance. But before SVB failed, it was going relatively well.
It might seem that the opposite is true, at least according to a report from the University of California. But since this report only looked at funds with vintages of 2018 or later, which have not yet hit the critical J curve, calling these funds "underperformers" wouldn't tell the whole story, because the numbers don't take the cycle into account. bottom life.
If it is broken down, it is appreciated better. Most fund life cycles are about 10 years, but they don't start making money right away. A fund typically invests the capital for three to five years, causing its "return" to decline. Once the fund is implemented, it hits that “J-curve” and begins to see its value rise again sharply as the assets in the fund gain in value.
There are ways to change this timeline: VC firms can sometimes back a company at a relatively early stage and exit the investment within 12 months. But 2021 was not normal. Excluding the last two years, what's been happening at Sequoia, for example, would be totally normal in a healthy market.
So what were most hedge funds like? de facto? The data shows that, as a whole, hedge funds, while not immune to market pressures, were doing well.
A recent PitchBook report looked at the performance of venture capital funds at all stages, regardless of maturity. The report found that the one-year rolling IRR was 2,8%, the lowest since the fourth quarter of 2016, not a particularly bad year for venture firms.
That number includes funds throughout their life cycle, which implies that there are funds in that dataset that are still deploying capital. Naturally, those funds will have low or even negative returns at this point. Sure, no one strives for a 2,8% return, but that number includes a wide range of funds that do better than that, plus early-stage funds.
While cumulative returns for individual quarters were still declining through the third quarter of 2022, according to the UC endowment report, and this is likely to continue for a while, it's important to remember that business investment is a long-term game. term. The three-year, five-year, and 10-year horizon IRRs register 26,8%, 22,8%, and 16,6%, respectively. It is worth noting that most of the great LPs they aim an annual return of 7% to 10%.
Looking at both individual LP and fund performance doesn't raise strong red flags either. In fact, it actually shows some really bright spots.
Los Angeles Fire and Police Pensions reported that its investment portfolio it had a net IRR of 10% and a net yield multiple of 1,76x until the third quarter of last year. Is that the best performance we've ever seen? Of course not, but it's still better than some of the "blue-chip" venture capital funds, even in good times.
recent data from the Los Angeles County Employees Retirement Association show that two of the best performing funds since the inception of its private equity portfolio are 2014 vintage venture capital funds, which are nearing maturity, if they haven't already.
The JSV Opportunity Fund 2014 (Jackson Square Ventures) and USV 2014 (Union Square Ventures) had a total value of paid-in capital (TVPI) of 6,94x and 5,98x, respectively, through the end of 2022.
This means that investors were receiving much more money than they invested. In terms of TVPI, it breaks even at 1x. Any LP would be happy with those numbers, especially when those funds reach the end of their life cycle.
Another silver lining here is that some sizeable LPs, who have more data on how their investments are doing than we do, were looking to increase the amount of money they invest in the asset class.
Very few have retired and some are indicating they are looking to increase their exposure or find new managers. The University of Michigan stated in a recent board meeting which will continue to expand its PE and VC portfolio in 2023. The City of San Jose Police and Fire Department Retirement Plan is also seeking invest in venture companies this year as the asset class is currently under target. Also, while many said LPs would flock to the family, some, like the San Francisco Employee Retirement System, are still forging new relationships of managers in your PE portfolio.
So while there is no doubt that some funds may be struggling, perhaps more so now due to market pressures for the bankruptcy of Silicon Valley Bank, the current performance of the companies does not give reasons for a general panic yet.
