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Mercurial market hits VCs
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November 1, 2000: 10:37 a.m. ET
Returns among U.S. venture funds drop precipitously in the second quarter
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NEW YORK (CNNfn) - The turmoil in the stock market of spring 2000 took venture capitalists along for the ride, sending their quarterly returns to the lowest level since 1998.
All U.S. venture funds posted a 3.9 percent return in the quarter ended June  30 according to a survey conducted by Venture Economics, a Newark, N.J.-based company that studies the private equity market. By comparison, the return for all venture funds was 24.2 percent in the second quarter of 1999. This was the first quarter since the end of 1998 that returns for venture funds dipped below 10 percent.
Other private equity funds also suffered during the second quarter, the latest figures available. Buyout funds clocked negative quarterly returns for the first time since 1998.
Returns reflect weak market
The disappointing quarterly returns should not come as any surprise because of the downturn in the market, said Jesse Reyes, a Venture Economics vice president. He added that many newer funds, those raised over the last three years, are heavily invested in Internet and other technology companies, which were among those whose share prices dropped in the second quarter.
"The market has invalidated many of the assumptions on which these companies are valued thus bringing unrealized performance down considerably," Reyes said. "While the venture industry shifted focus from consumer-oriented dot.com investing over the last couple of years to more upstream infrastructure technology investing, it will be a while before the effects of the dot.com market volatility to work its way out of venture portfolios."
He added, however, that one should not read too deeply into the poor returns of one quarter.
"While one should never draw definite conclusions from any one quarter's results, the downward trend in short term performance over the last six months will probably continue through the end of 2000 as the effects of public market volatility makes its way through to the private markets," Reyes said.
Many venture firms have already been diversifying and restructuring their portfolios to avoid too much exposure to the volatile technology sector, Reyes added.
Down, but not out
Venture capital returns reflected the relatively weak IPO market in the second quarter, according to Venture Economics. The venture-backed IPO was weak in the second quarter, with the number of venture-backed companies completing IPOs at its lowest level in more than a year.
Only 54 venture-backed companies completed IPOs in the second quarter, compared to 70 venture-backed IPOs during the second quarter of 1999. The size of the IPO offerings also dropped, to $4.4 billion from $5.4 billion a year earlier.
Despite the relatively poor short-term performance, the survey also revealed that private equity funds still yielded strong returns over a longer horizon. Among all private equity funds, the five-year return was 29.9 percent in the second quarter, with a 10-year return of 21.6 percent and a 20-year return of 19.9 percent.
The Venture Economics Private Equity Performance Index is calculated using data collected on the performance of more than 1,200 U.S. venture capital and buyout funds and 425 European private equity funds. 
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Venture Economics
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