Preqin in a November 2014 report titled: “The Turning Point for Venture Capital?” notes that for 62% of investors surveyed, venture capital fund investments in the past 12 months have met expectations.
According to the Preqin report, the pattern for venture capital returns indicates clear underperformance relative to other strategies over 10 years. However, the last three- and one-year periods highlight venture capital horizon IRRs improving from 12.7% for the three-year period to March 2014 to 27.0% for the one-year period to March 2014, outstripping all other strategies. The following graph captures PE horizon IRRs:
Tracking the performance of venture capital over time, one notes that in the one-year period to December 2000, venture capital was still riding high on the dot-com boom with a horizon IRR of 38.1%. However, with the bursting of the internet bubble at the turn of the millennium, the one-year horizon IRR of venture capital plummeted to -34.3%, and didn’t get back into the black until 2004.
Venture capital market turnaround is evident
However, post the dot-com slump, venture capital returns improved for more recent vintage funds. The following graph captures the ongoing reversal of fortune for venture capital returns:
Interestingly, the Preqin report points out that in stark contrast to the venture capital funds of vintage 2002, which have a top quartile margin that lags far behind all private equity, 2011 vintage venture capital funds (excluding early stage) surpassed the top quartile boundary net IRR of all private equity by 220 basis points.
The report also highlights that such an enhanced performance is not just restricted to top performing funds. As can be deduced from the following graph, bottom quartile venture capital funds have also witnessed a marked improvement, recently moving into the black for the first time:
According to the report, the enhanced performance reflects the high portfolio valuations and the favorable exit opportunities that are evidently being found by venture capital fund managers. Citing its latest fundraising figures, Preqin notes that the total amount of capital secured by venture capital vehicles in 2014 YTD ($38 billion) has already outperformed the total secured in 2013 ($31 billion), and looks set to eclipse the total raised for the last several years, as set forth in the graph below:
The accumulated data make it clear that the global venture capital landscape is presently witnessing favorable conditions pointing to a healthy fundraising market and a strong deal environment. The Preqin report notes if the recent performance is sustained, more investors will take notice and we are likely to see a rejuvenated venture capital market.