US PE returns continue to fall

Annual US private equity returns were negative for the eighth consecutive quarter, reflect falling valuations and limited exit opportunities. This is according to the year-end 2002 Private Equity Performance Index results produced by Thomson Venture Economics and the National Venture Capital Association.

Venture capital funds have been hit hardest with two years of losses of 20 per cent or more. However, the equity markets have all been adversely impacted by the 1995 to 2000 technology boom and private equity performance still manages to outpace NASDAQ.

Jesse Reyes, vice president at Thomson Venture Economics, says: “The two and a half years downturn in venture and private equity returns are not surprising, given what has been going on in the public markets. The tide seems to have lowered all ships. The inevitable winnowing process that this will create will ultimately leave a much leaner but probably more robust investment market for private equity investing. The fact that 20-year returns for early and seed stage funds are still above 20 per cent demonstrates that it is not an investment asset class for the short-term mind set. While their returns are probably the most volatile, they ultimately have demonstrated the best long term performance.”

The early performance of recent funds compares unfavourably with the performance of earlier vintage funds after a similar period. For example, after three years of activity, 1996 vintage year funds had returned 1.11 times the original investment to the investors and remaining portfolio companies had a combined valuation of 3.85 times the original investment. In contrast, 1998 funds have returned 57 cents on the original investment dollar and the remaining portfolio companies have a valuation of 94 cents on the dollar at the three-year mark.

Vintage year 1999 funds have returned just 20 cents on the original investment dollar with remaining portfolio companies having a valuation of 43 cents on the dollar. Only time will tell if these younger funds will meet the expected long-term return threshold of 15 per cent to 20 per cent.

TABLE

Headline] Venture Economics’ US Private Equity Performance Index (PEPI)

Subhead] Investment Horizon Performance as of 12/31/2002

Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr

Early/Seed VC -27.6 -4.7 51.4 34.9 20.4

Balanced VC -22.8 -8.0 20.9 20.9 14.3

Later Stage VC -15.7 -8.5 10.6 21.6 15.3

All Venture -23.3 -6.8 28.3 26.3 16.6

All Buyouts -5.5 -5.6 1.1 8.7 12.3

Mezzanine -1.7 1.2 6.3 9.8 10.3

All Private Equity -11.0 5.4 7.8 14.8 14.3

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Public Equity Returns as of 12/31/2002 (%)

1 Yr 3 Yr 5 Yr 10 Yr 20 Yr

NASDAQ -31.6 -31.0 -3.2 7.0 7.1

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Source: Thomson Venture Economics/National Venture Capital Association

*The Private Equity Performance Index is based on the latest quarterly statistics from Thomson Venture Economics’ Private Equity Performance Database analysing the cash flows and returns for over 1600 US venture capital and private equity partnerships with a capitalisation of $534 billion. Sources are financial documents and schedules from Limited Partners investors and General Partners. All returns are calculated by Thomson Venture Economics from the underlying financial cash flows. Returns are net to investors after management fees and carried interest.

TABLE

Headline] Results for selected vintage years – three-years from inception

Year of Measurement Realised return Unrealised Total Return

Fund Date (3 years (DPI) (RVPI) TVPI=DPI +RVPI

Formation from inception) (times) (times) (times)

1984 12/31/1987 0.06 1.00 1.05

1990 12/31/1993 0.13 1.02 1.16

1996 12/31/1999 1.11 3.85 4.96

1998 12/31/2001 0.57 0.94 1.51

1999 12/31/2002 0.20 0.43 0.63

Source: Thomson Venture Economics/National Venture Capital Association

DPI (distributed to paid-in) = ratio of distributions paid out to investors to the original invested capital

RVPI (residual value to paid-in) = ratio of remaining portfolio holdings as valued by the venture firm to the original invested capital

TVPI (total value to paid-in) = ratio of distributed and undistributed portfolio value to the original invested capital