Capital ventures forth … cautiously

Everyone likes venture capital. It’s one of the feel-good asset types that fiduciary investors can believe makes a difference to society. Unfortunately, for the past 10 years it has also, on average, lost money.

But figures for the past year or so show the first real sign of life in venture capital since the tech bubble burst in 2000. According to Cambridge Associates’ private equity and venture indexes, both private equity and venture have now posted six consecutive quarters of positive returns, ending September 30.

The US indexes represent most institutional capital raised by private equity partners since 1986 and venture partners since 1981 – the best set of data anywhere in the industry.

With an uptick in returns during the September quarter, venture capital returned 8.2 per cent for the 12 months, reversing a slowing growth rate evident in the previous two quarters. Private equity, which tends to be skewed towards big buyouts, returned 17.7 per cent for the 12 months.

But over 10 years, which now excludes the record 1999 vintage year when IT companies were floated or sold for mad valuations, average venture returns have been minus 4.6 per cent.

Over the very long-term, venture in the US has performed very well. Over 20 years, for instance, the Cambridge index shows an average annual return of 25.6 per cent, which is more than twice the return from private equity. And to underscore the importance of the hit year 1999, over 15 years to September last venture has returned a whopping 36.9 per cent.

So, is venture on the way back? Believers in mean reversion and Silicon Valley watchers would probably say ‘yes’. But George Siguler, a veteran private equity manager in the US, would sound a word of caution.

His company, Siguler Guff, has a venture-loans fund but has always stayed wary of venture equity. He explained recently that it is very difficult for professional fund managers to consistently make money from US venture. This is not because many venture companies fail – that goes without saying – but, rather, because there is so much “insider” money, particularly around Silicon Valley. Fund managers are often the last to know about the latest invention which has become the talk of the town.

Another reason is that protection of intellectual property by big technology and pharmaceutical companies is a lot stronger than it was 10 years ago, so there are not as many start-ups resulting from staff departures taking ideas – theirs or other people’s – with them.

And, finally, the developing world is catching up. With China, for instance, there is nearly twice the money being spent on new clean-energy programs than there is in the US. And this is primarily government money, with little opportunity for private investors to get in on the ground floor.