Returns from venture funds globally reached a record level in Q2 2020, despite the Covid-19 crisis, and remained high as the year progressed, according to eFront’s latest Quarterly Private Equity Performance report.
Up to the end of Q3, 2020 has been an exceptional year for venture capital performance, with funds globally recording an increase in aggregated multiple of invested capital (TVPI), rising from 1.58x in Q3 2019 to 1.63x in Q3 2020.
So far, it is difficult to find any impact of the Covid-19 pandemic on the performance of active VC funds. Their aggregated multiple of invested capital reached an all-time high of 1.64x in Q2 2020, when the pandemic was unfolding. The performance has now reached a plateau above the 1.6x threshold, but this is a far cry from a correction.
The first three quarters of 2020 show an even higher positive deviation from the average TVPI than 2019, which was already an exceptional year. Therefore, in terms of performance, active VC funds have so far gone from record to record. This evolution echoes the progression of the valuation of listed tech firms.
In tandem with VC performance reaching record highs, selection risk – as measured by the difference in performance between fund managers belonging to the top and the bottom 5 per cent – has also risen to historic levels. Q2 2020 set a new record at 1.98x, showing that the selection of VC fund managers is very demanding. There remains the potential that the TVPI spread will cross the 2.0x threshold, with the top 5 per cent sitting at 2.75x, while the bottom 5 per cent records a 0.79x.
Thus, in terms of TVPI spread, the first three quarters of 2020 have deviated the most from the average of active funds. Until recently, performance was increasing while risk remained fairly stable. The fact that the TVPI has stabilised while the TVPI spread has increased is somewhat new, and this divergence from historical patterns could signal more challenging market conditions in which some managers thrive, while others increasingly struggle.
Time-to-liquidity for venture capital funds, meanwhile, has remained remarkably stable since Q2 2019 (see Figure 3). On average, investors receive capital back after 3.48 years. This is slightly above the average of active funds, standing at 3.33 years, and implies that the peak of TVPI highlighted above is a mix of distributions and increase of net asset values.
These distributions are good news for fund investors and managers alike. For the former, this is a reassuring perspective on valuations and performance. For the latter, it ensures that investors have capital for upcoming fundraising exercises. Track records matching with distributions are a solid argument in a competitive fundraising environment.
Active VC funds have recorded a stabilisation of their TVPI during Q2 and Q3 2020, in line with the conclusions in the previous section. Therefore, the overall picture remains essentially unchanged. Individual vintage years stayed on course, which had two consequences. First, vintage years that were close to the average (2014 and 2016) kept their positions, while the strong ones (2011, 2012, 2013 and 2015) continue to fare well.
For active US funds, Q2 lead to a rebound and Q3 a stabilisation, mimicking the price of listed stocks of American technological companies. Western European funds, meanwhile, recorded a decline in performance in Q3 2020. As a consequence, some of the recent vintage years might cross the historical average and underperform it.