|
AltAssets is the private equity news and research service from Almeida Capital
|
|
|
PRINT THIS PAGE Profitability of venture capital investment in Europe and the US28/06/2006. Source: European Commission. 
This paper from the European Commission examines the profitability of European venture capital investment and presents some comparative analysis of the returns generated by European and US venture capital funds. The analysis is mainly based on the Thomson VentureXpert database maintained by Thomson Venture Economics, which is widely used by institutional investors for benchmarking venture capital and private equity investment.
On average, the overall profitability of European venture capital investment looks low. As of the end of 2003, the average internal rates of return (IRRs) for five and ten year investment horizons were 2.3% and 8.3%, respectively. The performance of early stage venture investment appears particularly disappointing with five and ten year investment horizon IRRs as low as -1.8% and 1.3%. For development stage venture investing the IRRs are better, but at 4.6% and 10.7% for five and ten year horizons, there is uncertainty about the sustained competitiveness of venture capital in relation to other alternative assets, such as hedge funds and real estate, on a risk adjusted basis.
The picture that emerges of the US market points to a much more profitable venture capital industry with the asset class showing IRRs of 22.8% and 25.4% for five and ten year investment horizons as of end 2003. In early stage venture investing the performance gap between the European and US funds is even more striking with US funds showing IRRs of 54.9% and 37.0% for five and ten year horizons. Also the returns produced by development stage investing appear clearly superior at 19.4% and 20.4% for five and ten year investment horizons as of end 2003.
The venture capital industry is not homogenous, however. There is great dispersion in the returns produced by individual funds, in particular in the US but also in Europe. By being able to invest in the very best funds, an institutional investor may achieve returns that far exceed averages. Conversely, an ill-advised choice of funds could result in very poor returns for the investor.
A comparison of the cash distributions paid to investors by European and US venture capital funds shows that US funds return cash sooner, indicating that their investments are not only more profitable, but also are realised earlier. For the fund investor this means that the investment is locked in illiquid assets for a shorter period of time. The analysis suggests that US venture capital funds benefited more from the high asset prices during the technology investment boom than their European counterparts. This could be one element in the profitability differential in comparison with European funds. The venture capital performance gap recorded between Europe and the US could therefore progressively narrow as the effect of the technology boom becomes lesser in aggregated fund performance data.
Click here to view full research paper (pdf 380 KB) You need Adobe Acrobat to read this document. If you do not have it, you can download it free from www.adobe.com/products/acrobat/readstep.html
This document was contributed with kind permission of the European Commission. For more information please contact www.europa.eu.
|
 
|
|
|
