Venture returns shine through

I was asked to attend a meeting last month with a well-known academic. The topics centred around venture capital returns, labour-sponsored fund structures (LSIF), and the wisdom of concept that “less venture capital means better venture capital”.

It wasn’t the most productive of meetings. The Phd Professor didn’t seem interested in being challenged, and since I hadn’t read EVERYTHING he had written over the prior 10 years, we were somehow not appropriately equipped to engage him on his points of view.

Although not uncommon his thesis is remarkably simplistic, despite the attempts to dress it up in Ivy-covered complexity: the world needs more funds such as Sequoia and Kleiner Perkins, not small Canadian venture funds and LSIFs. The LSIF model drives him particularly crazy, primarily because no where else in the industrialized world is the approach utilized.

I took exception to that, citing the U.S. business development companies and the U.K. governments’ fostering of that VC market as examples of retail participation. “Those haven’t worked out, either” was the reply.

And then there’s the issue of returns. One of the key complaints by marquee academics and the C.D. Howe Institute has been that the Canadian venture fund returns are “poor” (see prior post “What do LPs want?” June 4-08). I pointed out to the Profesor that venture and LSIF returns certainly swamped the S&P, NASDAQ, the Russell 2000, etc.

“Ya, now that the market has crashed,” was the rebuttal. Not true, but I bit my tongue. Venture returns exceeded all other asset classes long before the Dow and TSX crashed (see prior post “Buyout vs. Venture returns” February 20-08).

VCs have to suffer for the impact that the Tech bubble burst has had on their post-2000 returns, but public market PMs get a free pass when their market explodes? Reminds me of the scientists who throw out trial data that doesn’t fit their conclusion.

Over the past week, the Q3 2008 private equity and venture capital returns have been released, and they continue to tell the tale. Venture capital still beats Buyout and Public Market Investing over the long term. And, for the first time in a while, the one year returns are also superior:

All Venture:

1 year: (1.6%)
3 year: 6.6%
5 year: 8.6%
10 year: 17.3%
20 year: 17.1%

All Buyout:

1 year: (8.2%)
3 year: 7.2%
5 year: 12.2%
10 year: 7.3%
20 year: 11.2%

NASDAQ:

1 year: (21.4%)
3 year: (1.1%)
5 year: 3.1%
10 year: 2.1%
20 year: 8.7%

S&P 500:

1 year: (22.0%)
3 year: (1.7%)
5 year: 3.2%
10 year: 1.4%
20 year: 7.5%

One subset of the buyout figures is particularly striking. The one year return for “Mega Buyout” funds (more than US$1 billion under management) are negative 9.7%; a performance far worse than every venture category early/balanced/late stage. Which means that anybody who put more than $5 billion of commitments into that particular class in 2006 and 2007 is unhappy. Both in absolute and relative ways.

Which large Canadian institution was writing those cheques, while backing away from venture at the same time? If you are a regular around this space, you won’t even require a clue.

MRM