VC returns lean to positive

Venture capital performance showed modest improvement through the year-end 2006, according to new data released last week by the National Venture Capital Association and Thomson Financial (publisher of PE Week).

In particular, five-year performance moved from negative to positive territory (-1.2% to +1%), over data through the end of Q3 2006. It was the first time five-year VC returns entered positive territory since the period ending December 2003. No specific explanation is given for the increase, although it is most likely attributable to the five-year period’s starting point moving from late-bubble activity.

The only negative return was the early/seed fund 5-year returns, as many of these vintage companies have yet to return money to the funds. Three-year venture returns remained constant at 9.1% in Q4 2006, while 1-year venture returns posted a 16.4% return in Q4 2006, up from 7% in Q3 2006.

Ten and 20-year returns remained steady at 20.3% and 16.6%, respectively.

Private equity has historically outperformed the S&P 500, but critics often argue that the advantage disappears once fees are taken into account. In other words, it’s a narrow edge that might not justify the risk. Over the past year, however, private equity firms have been doing their darndest to remove risk from their equations, and the result is reflected in performance data, specifically, in the short-term buyout performance. One-year performance for buyout firms leaped from 19.4% to 24.5% between the end of Q3 2006 and the end of Q4 2006. Three and five-year performance also experienced increases, to 14.6% and 10.1%, respectively.

Ten and 20-year performance dipped just slightly to 8.5% and 12.9%, but has remained relatively consistent for the past several years. —Dan Primack