VC Returns Suffer Third Quarter Dip

Last year’s record-breaking performance among private equity funds will be hard to repeat as market volatility in Internet and technology stocks have pushed the 3-month IRR below 10% for the first time since 1998. According to Private Equity Week publisher Venture Economics, U.S. venture funds posted a 3.9% return in the second quarter, a sharp decline from the 23.1% gain reported for all venture firms in the first quarter.

“While one should never draw definite conclusions from any one quarter’s results, the downward trend in short-term performance over the last six months will probably continue through the end of 2000 as the effects of public market volatility makes its way through to the private markets,” said Venture Economics’ Jesse Reyes in a prepared statement.

Buyout and mezzanine funds were hardest hit, as the tumbling markets slammed the window on new public offerings. They measured negative returns for the first time since 1998. Buyout funds reported a 0.9% loss for the second quarter, while mezzanine vehicles lost 3.8%. These losses pulled down the performance of all private equity firms during the period. As a whole, private equity funds boasted gains of only 1%.

Weak performance during the quarter also translated into sharp declines in one-year returns for venture funds. Venture funds – from early-stage to later-stage investors – maintained one-year returns of 143.4%, a decline of 3,930 basis points over last quarter’s 182.7% one-year returns.