Venture funds' slide continues
Average returns post 27% loss in 2d quarter; slow economy cited
By Beth Healy
Boston Globe Staff
10/15/2002
Venture capital returns sank deeper into the red ink in the second quarter amid a plunging stock market and a slow economy that's threatening the survival of many young, high-tech companies.
For the 12 months ended June 30, the average fund had posted a 27 percent loss, according to a report released yesterday by Venture Economics and the National Venture Capital Association. The decline compares with a three-year annualized return of 26.5 percent and a five-year average per-year gain of 30.6 percent.
Early-stage venture funds, which produced some of the most intoxicating profits in the late 1990s, are faring worst this year. Such funds saw an average loss of 35.3 percent for the year ended June 30, while later-stage venture funds showed a 12-month loss of 20.5 percent.
The grim numbers are dragging down the investment performance this year of endowments, foundations, and pension funds that invest in venture capital. They also reflect the inhospitable stock market, analysts said, as venture capitalists have hardly been able to take companies public for more than a year. It's through public stock offerings that VCs typically exit their investments and deliver gains to their investors.
In addition, the lackluster economy has made it difficult for companies to sell products, grow, and gain value.
Mark Heesen, president of the National Venture Capital Association, a trade group that represents the industry, said that without a healthy market for IPOs or acquisitions, it's virtually impossible for venture firms to show gains in their portfolios.
''We don't expect to see private equity returns improve substantially until the economy begins to recover and exit options emerge,'' said Heesen.
Buyout funds, which tend to invest in later-stage companies and produce more modest returns even in good times, fell 11.4 percent in the year ended June 30. Over five years, their average annual gain is a meager 3.4 percent.
The poor return numbers come as the venture industry is fighting a growing battle to keep firm-specific returns secret. The University of Texas recently was forced by that state's attorney general to make public venture returns that ordinarily are private. Some venture firms are threatening legal action to ensure that venture returns in the Massachusetts state pension fund are not revealed. The industry has argued that venture returns are too complicated for most people to understand. But it's clear there is extra sensitivity this year, given the embarrassingly bad results some firms are experiencing in this third year of a vicious bear market.
Venture capitalists say that losses in the first year of a fund launched in 2001, for example, are misleading. Funds are typically 10-year vehicles, meaning portfolios that are underwater today could well turn profitable over the next several years, as markets improve and companies can once again be sold or taken public at large gains.
Proponents of greater disclosure by venture firms argue that firms should find a way to post the returns of mature funds, so that investors - as well as others with an interest in pensions or endowment funds that invest in venture capital - can accurately compare performance. Even the venture economics numbers, which don't reveal the performance of specific firms, are considered suspect by many industry analysts, because firms submit their returns voluntarily and the results may not reflect the entire sector.
Beth Healy can be reached at bhealy@globe.com.
This story ran on page D1 of the Boston Globe on 10/15/2002.
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