The author is Cambridge Associates, a provider of independent investment advice and research to institutional investors and private clients worldwide.
Venture capital performance improved across both short- and long-term time frames as of September 30, 2012, rising for the quarter in the 1-, 10- and 20- year horizons, according to the Cambridge Associates.
U.S. Venture Capital Index, the performance benchmark of the National Venture Capital Association (NVCA). Slightly lower returns were seen in the 3-, 5-, 15- year horizons as a weak third quarter exit market kept improvements across all time periods at bay.
Additionally, the venture capital index outperformed the DJIA, NASDAQ Composite and S&P 500 across the 5-, 15- and 20- year time horizons, falling short of these public indices in the 1-, 3- and 10- year periods.
"Despite continued fits and starts in the exit market in 2012, we continue to see the 10-year performance number move steadily in the right direction, more than doubling from this time one year ago," said Mark Heesen, president of NVCA. "That said, to once again consistently outperform the public markets and to get back into double-digit territory across all time horizons, we need more certainty in the capital markets and across the political spectrum."
"The third quarter saw distributions from venture funds hit their highest level since the first quarter of 2001 and outnumber contributions for the sixth time in eight quarters," said Peter Mooradian, managing director and venture capital research consultant at Cambridge Associates. "Performance during the quarter was muted, however, largely due to written-down values in the IT sector, the largest in the index."
Vintage Year Return Ratios
The chart below lists the ratio between the dollars paid into venture capital funds by limited partners (LPs) and the dollars distributed to them by vintage year.
For example, the 2004 vintage year funds have distributed cash of 0.53 times the amount of capital paid in by LPs and the residual value is 0.87 times the paid-in capital; the total value multiple is therefore 1.40 times. It is important to note that the residual value is unrealized and will change as companies exit the portfolio, are re-valued, or are written off.
The 1996 vintage year funds continue to have the most positive ratio of the last three decades, returning 4.97 times the capital contributed by LPs, a number which rises to 5.01 should those funds realize the value of what remains in the portfolio. More recent vintage years have yet to return significant cash to LPs as most funds do not have the opportunity to begin returning capital until after year five.
Additional Performance Benchmarks
To view the full, comprehensive report, which includes tables on additional time horizons, vintage years, and industry returns, please visit the Cambridge Associates or NVCA websites.
Cambridge Associates derives its U.S. venture capital benchmarks from the financial information contained in its proprietary database of venture capital funds. As of September 30, 2012, the database included 1,400 venture funds formed from 1981 through 2012.