Short-term returns of US private equity investments are still deeply in the red, according to figures released by the NVCA and Venture Economics today. One-year private equity returns measured minus 14.6 per cent in the first quarter of this year, a modest improvement on minus 19 per cent recorded in Q4 2001.

One-year venture returns were minus 24.4 per cent in Q1 2002, a marginal increase on the dismal minus 27.8 per cent recorded for Q4 2001. But despite this modest recovery returns are still well below previous figures. Last year’s performance index showed venture one-year returns at minus 6.7 per cent in the first quarter.

Venture Economics blamed poor exit opportunities for the ongoing weakness in returns.

‘VCs have a lot of good companies ready to exit, however the roiling public markets, and the downward pressure on valuations continue to degrade short term performance,’ said Jesse Reyes, Vice President at Venture Economics. ‘The industry needs exits to realise returns to their investors.’

The report shows that mezzanine and buy-out returns were the strongest, at minus 3.2 per cent and minus 10.7 per cent respectively, and that early-stage venture returns were the weakest at minus 31.8 per cent.

The NVCA was cautiously positive about the future, suggesting that ‘the worst may already have passed’. But it seems likely that exit opportunities will remain extremely limited for some time. Until this past year, the lowest ever one-year returns were 1.4 per cent in 1984.

The good news for those investors with genuinely long-term investment policy is that ten-year returns continue steadily to outperform the public markets. The index shows that private equity ten-year returns are looking stable at 16.6 per cent.

Copyright © 2002 AltAssets

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