Venture and Buyout Returns Converge – Does it still make sense to invest in both?

One of the well documented cyclical features of private equity and venture capital returns is that for most of their history, there has been an inverse correlation between the two asset classes. That is, when times are good for venture, they are not as good for buyouts and vice versa.

The rationale for this has been that buyouts depend on low prices to generate good returns and when venture returns are elevated, pricing is less than optimal for buyouts.

To demonstrate this, I’ve plotted data from Burgiss’ PrivateIQ returns database for the most recent 20 years merged with data from some of my prior research.

This data plots five year trailing returns for each asset class. — Why five years? I’ve been using this particular metric for at least the last 20 years as a good mid-point weighted barometer of each industry’s returns. It’s the end of the investment period for most limited partnerships and is the mid-point of the typical 10-year life fund.

Five year trailing returns Venture vs Buyouts

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Venture Capital has the best year since the Internet bubble burst — Renaissance or just a peek out of the Dark Ages?

VC-post-internet-returns-20131231

There have been numerous headlines heralding the venture capital industry’s comeback after the long decade post-internet boom and bust. Others have been skeptical and opine that venture capital’s glory years are long behind it and while we continue to have more IPO exits and home-run technology investments, the industry is but a shadow of itself.

We now have the data to examine whether the industry is in real recovery. In this post we’ll use the data from the Burgiss Private iQ system to examine the case for recovery. In the next post, we’ll examine some factors which might throw a bit of a shadow on that conclusion.

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2013 Q3 Private Equity Performance – Continued Recovery ? (part 1)

by Jesse Reyes

The industry performance statistics for the US private equity for Q3 of 2013 have been available from Burgiss’ Private IQ market intelligence system for about a month.  Rather than rush to press with the latest and greatest news, I’ve spent some time doing a deep dive on what the latest set of numbers mean for the industry.  We will spend a bit of time over the next few posts analyzing the industry’s track record and putting these results in perspective.

2013 Q3 Results

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PME- A History

PME timeline

by Jesse Reyes

Cambridge Associates just announced a “New Method to compare public market and private market returns”. see press release

Comparing private equity returns to public market returns has always been problematic since private equity has been firmly ensconced in the Internal Rate of Return (IRR) while the public markets have been measured by time-weighted returns – the two returns are incommensurable directly (more on that in a later post)– although that doesn’t stop the financial and mainstream press from doing just that-much to my (as well as that of many of my quant’s brethren’s) chagrin.

The Cambridge Associates method is the latest in a series of alternative approaches to direct public/private market comparison which first surfaced about 20 years ago.

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Standards–Back to the future

gips timeline

Several recent events brought to mind the issue of performance/reporting standards.

My good friend at Privcap, David Snow recently remarked in an August PrivCap Digest article  “Will relaxed rules on general solicitation mean tighter performance reporting requirements”. His point was that with general solicitation now a reality for private equity firms, would/should there be a call for more rigorous standardization and/or transparency in performance reporting.
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Welcome to J-Curve

Welcome to J-Curve.

J-Curve.com is the home of J-Curve Advisors which was founded to advise general partners and other private equity professionals in navigating the increasingly complex quantitative environment they find themselves in.

J-curve provides commentary, information as well as advisory services to general partners and the industry at large.

This blog commentary is intended to provide a platform for analyzing published and unpublished research, data, techniques, and methodologies which impact quantitative analysis of the industry.  You should find this platform will be less about “news” and more about the metrics, statistics and analysis behind some of the news, thus creating a significant quantitative knowledgebase.

 

I have been fortunate to have developed a significant number of relationships with professionals in the private equity and venture capital industry over the past twenty-five years. Many of these professionals have contributed tremendously  to the body of knowledge concerning private equity research and quantitative analysis. Those relationships should find a home at j-curve as we review and analyze both proprietary and publicly-available research and data.

Our aim is to distill quantitative analysis to make it accessible for practitioner application, education and research. We will also highlight and comment on recent industry performance results and other statistics as they become available from our preferred partners.

We welcome contributors to this commentary.

Again, welcome to J-Curve and I hope this contributes as much to this knowledgebase as my many “quant” friends in the industry have.

 

Jesse Reyes