Fund performance: Venture returns hurt by valuation pullbacks

Venture returns are beginning to be hurt by the broad pullback in portfolio-company valuations of the past several quarters, according to a recent performance report from University of Texas Investment Management Co.

UTIMCO’s portfolio of active venture funds spans about two decades. A study of funds with 2003 to 2006 vintages found that almost two-thirds saw their IRRs drop in the six months through February 2016, the report shows.

The retreat has been relatively modest in most cases. Still, 11 of the 17 UTIMCO funds for the vintage years saw their IRRs shaved. Just five advanced while one held steady.

The trend suggests that the adjustment of portfolio valuations and exit values began during the second half of last year. It also suggests that more pullbacks are likely since valuations remain under pressure.

For the most part the portfolio continues to perform adequately. Only one of the funds had a negative IRR as of February and several generated strong returns.

Union Square Ventures continues to lead the portfolio by a wide margin, with its fund from 2004.

The $125 million fund backed Etsy, Twitter and Zynga, according to data from Thomson Reuters. The fund’s IRR was 66.6 percent as of February, a small setback from August of last year, according to the report. Distributions were 13x contributed capital.

Sofinnova Ventures‘ $375 million seventh fund from 2006 held second place with an IRR of 17.3 percent as of February. Its performance also retreated modestly, the report shows.

Technology Crossover Ventures’ sixth fund from 2005, which topped out at $1.4 billion, had an IRR of 14.04 percent.

Worth noting is that the UTIMCO portfolio favors smaller, early-stage funds. All but four are under $450 million in size, and more than half focus on early-stage or seed investing.

What seems evident is that valuations are adjusting broadly and more pain could be in store.

The list of 17 funds is available in the accompanying table with commitments, distributions and IRRs.