VC Returns Leave LPs Seeing Red

The obvious has been confirmed: 2001 was not a good year to be a limited partner in U.S.-based venture capital funds.

According to data being released today by Venture Economics (publisher of Private Equity Week) and the National Venture Capital Association, one-year returns on VC investments at the end of Q4 2001 came in at 27.8%. The biggest losers were early stage venture funds, which reported 33.9% returns. Later-stage VCs fared better, showing a -20% return while buyout funds posted a -14.5% return. The released data is compiled quarterly by tracking the performance of 1,400 U.S.-based venture capital and buyout funds formed since 1969. Returns are calculated net to investors after fees and carried interest.

While today’s figures certainly don’t paint a pretty picture of the VC landscape, they are a bit brighter than were the Q3 2001 results. One-year venture capital returns are up approximately 14% from the previous report, while both buyouts and mezzanine fund returns also improved.

Also improving were short-term results for both venture and buyout funds over three-month, six-month and nine-month investment horizons. Longer-term results over the 5-year, 10-year and 20-year time periods, however, were down slightly.

“We still have a ways to go,” says Peter Lawrence, managing partner with Stamford, Conn.-based Flag Venture Partners. “Any continued improvement will be tied to how soon we see customer traction and increased spending in the IT and communications sectors. Only then will we see portfolio companies be [consistently] able to raise subsequent rounds of funding and possible exits.”

As for how much money has actually been given back to investors, today’s report shows that younger funds have struggled to give money back to their limited partners. According to Venture Economics’ DPI chart (distributions/paid in), funds formed from 1999 onwards have paid virtually nothing back to their investors.

The next set of performance figures will detail up through the end of Q1 2002, and should be released this summer.

Contact Dan Primack at: Daniel.Primack@tfn.com

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