Distributions From Venture Funds Spike

Venture capital returns creep ahead in fits and starts. Performance over the 3-year and 10-year time periods is up from a year ago. But 1-year performance is down, and returns from venture funds largely trail public market benchmarks.

Distributions to LPs, however, have gone through the roof. In the third quarter of 2012, they hit their highest level since 2001, according to Cambridge Associates. And they look poised to go higher in the fourth quarter and beyond as firms continue to deliver profits from the Facebook IPO and elsewhere.

A chart courtesy of PitchBook illustrates this trend quite vividly. Distributions spiked in the first and second quarters of last year, marking the fourth and fifth quarters in a row where distributions exceeded called capital. (See the chart below.)

It is possible they could continue rising. Distributions correlate with strong exit markets, and while exits markets in general can’t be said to be great, they are healthy in some sectors. Distributions at the same time are often lifted by a relatively small number of strong exits. The LinkedIn IPO of 2011 comes to mind.

One sector with a favorable exit market is business software, particularly for companies with SaaS, or software-as-a-service, products. Expect it to contribute to distributions in the quarters ahead.

“That’s where the good exits are right now,” says Brian Jacobs, general partner at Emergence Capital Partners. “We’re going to see a lot of good offerings this year.”

Last year brought several strong enterprise deals – Workday, Splunk and Palo Alto Networks, for instance. Already a number of companies are on file to go out this year. Marin Software and Model N are two.

Others look ready to pounce. On the list of likely candidates are Apptio, Palantir Technologies, Marketo and HubSpot.

Another possibility comes from the Emergence portfolio, Veeva Systems. Jacobs says it is likely to file in the next few months and target an IPO in the third quarter. The company developed a SaaS-based CRM system for the pharmaceutical industry.

Venture returns may not yet look exciting. But distributions do.

Photo courtesy of Shutterstock.

1 Comment

  • I’m curious whether you GPs agree with me that distributions should increase in the fourth quarter as the November Facebook lock-up expires and exits, such as Workday’s, begin to generate returns.

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