venture capital returns
TRANSCRIPT
1 Steven N. Kaplan
What do Venture Capitalists do?
How Well Have They Done?
Steve Kaplan University of Chicago Booth School of Business
2 Steven N. Kaplan
Overview ■ Two parts to the talk:
– Performance: » How have VC funds performed?
■ How does VC compare to PE? » How will VC perform going forward?
– What do VCs do?
3 Steven N. Kaplan
How have VC funds performed?
■ Fundraising? ■ Performance?
4 Steven N. Kaplan
Fundraising (U.S.)
0
10
20
30
40
50
60
70
80
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
$ B
illio
ns
Commitments to U.S. Venture Capital Partnerships 1980 - 2015 (in $ billions)
Source: Private Equity Analysis, Steven N. Kaplan
5 Steven N. Kaplan
Fundraising (U.S.) as % of market
0.000%
0.050%
0.100%
0.150%
0.200%
0.250%
0.300%
0.350%
0.400%
0.450%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015
Source: Private Equity Analyst, Steven N. Kaplan
6 Steven N. Kaplan
Fundraising
■ Commitments to VC as a % of overall stock market has been much more stable than is commonly appreciated. – Usually between 0.10% and 0.20% of total stock market. – Big outliers were 1999 to 2001. – On the low side since 2009.
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What about performance for LPs?
■ How is performance measured? ■ Who measures performance? ■ What has performance been on average? ■ Are there good GPs? ■ Summarize results from
– Harris, Jenkinson, Kaplan (2014 and 2016) – Brown, Harris, Jenkinson, Kaplan, Robinson (2016)
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How is Performance Measured?
■ Two industry standards: – Annualized IRR (net of fees).
– Multiple of Invested Capital (MIC). » Total Value Returned / Invested Capital. » (Distributed Value + Residual Value) / (Capital in Cos. + Fees)
■ Each has its drawbacks.
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■ Each has its drawbacks:
– Net IRR: » Absolute (not relative).
■ Does not control for market movements. » Is sensitive to sequencing of investments.
– Multiple of Invested Capital: » Absolute (not relative).
■ Does not control for market movements.
How is Performance Measured?
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How is Performance Measured?
■ A 3rd method – KS PME (Public Market Equivalent). – Grow LP inflows / investments at S&P 500 (or other return). – Grow LP returns / distributions at S&P 500 (or other return). – Compare value of outflows to inflows. – If PME > 1, then LPs did better than S&P 500.
» + Does control for the market. » + Not sensitive to investment sequence.
■ Think of PME as a market-adjusted multiple.
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Does anyone use KS PME? Calpers
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Who measures performance?
■ Four commercial databases: – Burgiss – Cambridge Associates (CA) – Pitchbook – Preqin – Thomson Venture Economics (VE)
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What about performance?
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-20.0
0.0
20.0
40.0
60.0
80.0
100.0
120.0
140.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC IRRs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
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0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
9.0
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC MOICs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
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Question?
■ Have VC funds of vintages 2006 to 2013 beaten the S&P 500?
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0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
5.5
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC PMEs by Vintage Year, 1991 - 2013 Pooled Ave. as of September 2016
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0.4
0.6
0.8
1.0
1.2
1.4
1.6
1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016
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Overall return evidence
■ IRRs, Multiples and PMEs vary substantially across vintage years. – PMEs well above 1.0 through 1998. – PMEs below 1.0 1999 to 2002. – PMEs above 1.0 since 2003.
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Question?
■ How has PE done relative to VC?
■ Have PE funds of vintages 2006 to 2013 beaten the S&P 500?
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PE vs. VC performance? PMEs
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1999 2001 2003 2005 2007 2009 2011 2013
Source: Burgiss
U.S. VC and PE PMEs by Vintage Year, 1999 - 2013 Pooled Ave. as of September 2016
VC PME PE PME
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PE vs. VC
■ How has PE done relative to VC? – For 1999 to 2005 vintages, PE did much better. – For post-2006 vintages, VC has done better.
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What will happen going forward? Returns?
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Future Performance and Fundraising:
■ Performance in VC significantly negatively related to fundraising. – Even more so. – IRR in Vintage Year =
» 43% - 75 x VC inflows in current and prior year as % of stock mkt. – Multiple in Vintage Year =
» 4.39 - 626 x VC inflows in current and prior year as % of stock mkt. – PME in Vintage Year =
» 2.48 - 279 x VC inflows in current and prior year as % of stock mkt. – On average VC inflows = 0.135% of stock market. (2 years 0.27%).
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Vintage Year PME vs. Capital Committed
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Fundraising (U.S.) as % of market
0.000%
0.050%
0.100%
0.150%
0.200%
0.250%
0.300%
0.350%
0.400%
0.450%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Commitments to U.S. VC Partnerships as Fraction of Stock Market Capitalization 1980 - 2015
Source: Private Equity Analyst, Steven N. Kaplan
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What will the future hold?
■ Despite all the attention to start-ups / VC, commitments to stock market value not particularly high relative to historical means.
■ Will probably be higher this year, but nowhere near tech boom. – Commitments to PE are at historically high levels.
■ Accordingly, still feel better about VC than about PE.
61 Steven N. Kaplan
Steven N. Kaplan Neubauer Family Distinguished Service Professor
Entrepreneurship and Finance [email protected]