Venture hangs on to long-term pole position

Venture capital has been through probably its worst decade ever as an institutional investor asset class, as private equity – as dominated by buyouts – recovered over the past few quarters from some of the ground lost during the global financial crisis.

The latest report on private markets by US-based consulting firm Cambridge Associates, however, points out that over the very long term, venture still delivers on its promise of higher returns, notwithstanding greater volatility.

The report, for the 10 years ending March 31 this year, shows that private equity delivered a 22.3 per cent return in the year to March, against 6.5 per cent for venture. Both were measured in terms of Cambridge’s own indices. And both lagged the recovery in public markets, with the Dow Jones Industrial Average up 46.9 per cent during the same period and the NASADAQ Composite up 56.9 per cent.

Nevertheless, the report points out that venture still returned slightly more than three times that of private equity over the 15-year period to March and roughly twice the return over a 20-year period.

Private equity more closely tracks the public equity markets than venture and was therefore boosted in recent quarters due to the increased ability of general partners to exit through IPOs.

Over the long term, Cambridge, which is well-known for advising US endowments along with pension funds on their alternatives exposures as well as broad market asset allocation, says that both private equity and venture continue to outstrip public markets over the long term. For 15 years, for instance, private equity returned 12.0 per cent and venture 38.2 per cent against the S&P 500’s 7.8 per cent.

Peter Mooradian, Cambridge managing director and venture capital research consultant, says there was an uptick in valuations for venture-backed companies in the recent study period and exit opportunities were more plentiful.

“The number of (IPOs) hit the highest level in more than two years and (M&A) activity hit record levels during the quarter,” he says.

“The good news in terms of deal activity, however, was tempered by the fact that the average size of deals with disclosed values was down 20 per cent from the prior quarter.”

US Private Equity and Venture Returns to March 31, 2010

1yr % 3 yrs% 10 yrs% 15 yrs5
PE 22.3 1.3 7.2 12.0
Venture 6.5 -0.7 -3.7 38.2
S&P500 49.8 -4.2 -0.7 7.8
NASDAQ 56.9 -0.3 -6.3 7.4

Source: Cambridge Associates