Venture & PE Firms Return More Than They Take (This Time)

Usually, when I look at venture return data, it’s with a skeptical eye. Sure, portfolio valuations may go up in hot sectors where VCs are chasing deals. But how much of that will actually come back to limited partners in the form of actual cash?

Lately, it doesn’t look bad. VCs and private equity investors returned more capital to limited partners in the second quarter than they called down, according to a report released today by Cambridge Associates.

Managers of venture capital funds called $3.8 billion and distributed $4.4 billion during the quarter, according to Cambridge. Distributions increased 16% and it was the third quarter in a row that they outnumbered contributions.

Private equity fund managers, meanwhile, collectively called $14.7 billion and distributed $23.2 billion in the second quarter. While both figures were relatively similar to the previous quarter, distributions for the period were still among the highest in the history of the benchmark, according to Cambridge.
Returns numbers- which include both realized and unrealized investment gains – were even better-looking. U.S. venture returns for the second quarter totaled 7%, while private equity returned 4.5%.

Venture returns, predictably, were largely driven by investments in IT and healthcare, the two largest sectors in the index. In terms of vintages, the best performer was 2003, which returned 10.4%.

For the private equity index, software, which had the lowest average weight of the index’s meaningfully-sized sectors, had the largest return, 12.4%. The largest sector, consumer, which represented about one-fifth of the value of the index, returned 5.3%. The 2005-2007 vintage years accounted for nearly 63% of the index by weight, all delivering returns from 4.4% to 4.9%. They also represented 80% of the capital called in the quarter.

Overall, these numbers look pretty good. However, I’m still going to conclude with a bit of skepticism on the venture numbers. Although it certainly is nice to see VCs returning more cash than they call down, it’s worth noting that the venture industry overall was much larger several years ago. When I started covering the sector in 2006 and 2007, U.S. VCs’ annual fundraising wasn’t far off the $30 billion mark. The last couple years, it’s closer to half that.

Given that disparity, for VC distributions to really be stellar, I’d think they should be much larger than capital calls, given that the bulk of distributions are for years in which VC fund-raising overall was much bigger.