Venture capital returns are starting to show improvement, but returns for buyout funds are going the other way, according to first-quarter performance data from Thomson Reuters (publisher of PE Week).
One-year returns for venture capital funds fell in the first quarter, compared to the same period a year ago, while three-year returns fell slightly, five-year returns recorded a significant jump, 10-year returns declined moderately and 20-year returns gained slightly.
In contrast, returns for buyout funds were down year-over-year for all time horizons except for the five-year period. One-year returns took the biggest hit, coming in at just 10.8% at the end of Q1, down from 25.3% a year earlier (see table).
Mixed bag for VC
One-year venture capital returns fell in the first quarter, compared to the same period a year ago, while three-year returns fell slightly, five-year returns recorded a significant jump, 10-year returns declined moderately and 20-year returns gained slightly.
For the overall venture class, one-year returns stood at 13.3% on March 31, down from 15.8% a year earlier. The numbers were mostly hurt by returns on balanced stage venture funds, which posted a one-year return of 8.8% at the end of Q1, down dramatically from 23.1% a year earlier. In contrast, one-year returns for later stage funds surged to 30.4% during Q1, up from 20.3% a year earlier, and one-year returns for early stage/seed funds came in at 10.6%, up from 6.4% in that same time frame.
Returns looked much better for the five-year period. They stood at 9.1% at the close of Q1, up sharply from 2.7% one year earlier. There were gains in all three VC stages tracked by Thomson Reuters, with early stage/seed funds posting a five-year return of 4.8% (up from -1.3% a year earlier), balanced stage returns coming in at 12.7% (up from 6.4%) and later stage returns coming in at 11.1% (up from 4.3%).
The decline of 10-year returns had to be a disappointment, since the typical life of a venture fund is a decade. For venture funds as a whole, 10-year returns came in at 17.2% in Q1, down from 20.9% a year earlier. All stages showed declines during that period. Early stage/seed returns went from 37.8% in Q1 2007 to 34% in Q1 2008, while balanced stage returns went from 18.3% to 14.8% and later stage returns went from 9.8% to 8.6 percent.
VC is looking pretty darn good when compared to buyout funds.
For the one-year period, returns were down for all stages of buyouts. One-year returns for small buyouts went from 20.8% in Q1 2007 to 15% in Q1 2008, medium buyouts went from 31.6% to 19%, large buyouts went from 20.9% to 16.8% and mega buyouts went from 25.6% to 10 percent, according to Thomson Reuters.
The bright spot for buyouts was in the five-year time frame. Over that horizon, the combined return for all stages of buyouts went from 12.1% as of the first quarter of last year to 15.6% in the first quarter of this year. All four stages posted five-year gains from Q1 2007 to Q1 2008: Returns for small buyouts went from 7.2% to 9.4%, medium buyouts went from 9.2% to 12.2%, large buyouts went from 10.6% to 14.1% and mega buyouts went from 13.2% to 16.8 percent.
The near-term decline in buyout returns hasn’t hurt long-term results. The 20-year return for all stages of buyouts combined stood at 12.1% at the end of the first quarter, down slightly from 12.8% in the same period a year earlier.
For the 10-year period, however, returns have started to come down. The 10-year return for all buyout fund stages combined dropped from 9.5% in Q1 2007 to 7.9% in Q1 2008.
Better than stocks
Even with the declines, the venture and buyout asset classes have outperformed public stocks, as gauged by the Nasdaq and S&P 500 (see chart). Buyout returns beat both indexes for all time horizons and VC returns beat both indexes for all time horizons except for the five-year period, according to Thomson Reuters. For example, the Nasdaq posted a 10-year return of 2.2% and the S&P 500 came in at just 1.8% vs. the 10-year return of 17.2% for all stages of venture capital and 10-year return of 7.9% for all stages of buyouts.
The long-term performance of buyout and VC funds has kept wealthy individuals bullish about the asset class. A recent survey by Bank of America of more than 400 high net worth investors showed that there were happier with alternative investments than they were with traditional investments, such as stocks and bonds, over the prior 12 months.
Just 30% of those surveyed by BofA said they were happy with their traditional investments. Of the four major alternative asset classes, VC had the second highest satisfaction level, with 44 percent. Hedge funds ranked first (with 51%), followed by real estate (41%) and private equity (aka buyout funds) (35%).
The BofA survey studied more than 400 high net worth investors (those with greater than $3 million in investable assets). Of that total, 267 held investments in alternative assets.