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US venture capital performance continued improvement in Q3 04

Venture capital returns showed continued improvement in the third quarter of 2004 on the back of the ongoing recovery in exit markets, according to Thomson Venture Economics and the National Venture Capital Association.

The five-, ten- and twenty-year horizon returns for venture capital in the quarter were 10.5 per cent, 26.9 per cent, and 15.8 per cent, respectively. Long-term returns for all private equity were 4.7 per cent, 12.5 per cent, and 13.7 per cent for the same time period. Both asset classes continued to outperform both the NASDAQ and the S&P 500.

'The past few quarters have shown a vast improvement over previous time periods as venture capital firms have already written down most of their valuations and are reaping the benefits of the improving exit markets,' explained Sandra Ribeiro, research director at Thomson Venture Economics.

There were 24 venture-backed IPOs in the third quarter, including Google, and 83 companies were acquired during the third quarter.

'Since the tech bubble, VC's have refocused their attention to later stage and balanced deals, which are now yielding the higher returns in the short term,' Ribeiro said.

Within the venture capital asset class, each time horizon through the third quarter showed improvement over the second quarter with the exception of the five-year return. This decline was attributable to losses realised by some funds that invested between 1999 and 2000.

Mark Heesen, president of the NVCA, said, 'The last several quarters have told a very consistent story about what is happening in the venture capital asset class.

'The mistakes made during the tech bubble are working their way out of the system but are well-balanced by today's market which is getting healthier each quarter. Long term, venture capital will always be a tough asset class to beat as it consistently outperforms other investment options. We expect demand to participate will remain high,' he continued.

The recovery in the performance of venture funds has been driving a significant increase in institutional demand for the sub-asset class, itself reflected in the jump in venture fundraising over the past 12 months.

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