Venture capital funds produced average returns of 27% in the year to March 2014, higher than any other private equity strategy over the same period. Preqin's Christopher Elvin comments:
The Achilles Heel for venture capital funds since the turn of the millennium has, of course, been performance. Returns have generally been lagging well behind other private equity strategies, but despite this, many investors have stuck with the asset class. The main argument for this has been that while the average performance has been disappointing, the returns of the best funds have been excellent. If investors can identify and get into these funds, they have been able to do well.
Not all can be so lucky. For all but a select group of top-tier managers, firms have experienced largely lacklustre returns, which in turn have led to tough fundraising conditions. More recently, however, there have been encouraging signs across the industry, with returns significantly improving and fundraising picking up, particularly as market conditions become more favourable.
2014 YTD has witnessed a noteworthy increase in venture capital fundraising, with the total amount of capital raised by venture capital vehicles set to eclipse the total raised for a number of years. Venture capital vehicles reaching a final close this year (as of 14 October) have raised $38bn, already surpassing the $31bn raised in the whole of 2013.
Improving fundraising conditions are neatly demonstrated by the fact that venture capital funds are increasingly closing at or above their targets; 70% of funds closed in 2014 YTD have done so, up seven percentage points from 2013. Moreover, there are currently more venture capital funds in market (as of 23 October) than at any other point in the period 2007 – 2014, reflecting fund managers’ growing optimism regarding their fundraising prospects.
The resurgence of the venture capital market looks set to continue, with more than half (56%) of venture capital investors surveyed by Preqin are planning to make their next commitment to a venture capital fund by the end of 2015.
The venture capital renaissance can, indeed, only be judged on its most crucial aspect – returns. In this department, the figures speak for themselves; the three-year period to March 2014 shows venture capital IRRs at 12.7%, while the one-year period IRRs come in at 27.0%. This puts venture capital ahead of all other private equity strategies in terms performance over the same period.
The notable pickup in the fundraising market, deals and exit environment and vastly improved rates of return signal a brighter future for the asset class. The turnaround in venture capital fortunes is both welcome and highly significant for the industry, especially for investors looking for investment opportunities going forward.
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