VC Funds Had Their Best Year Ever. But There’s a Catch.

A closer look at the data raises the question of how much the rise in equity markets has influenced start-up valuations, according to a new report.

Michael Nagle/Bloomberg

Michael Nagle/Bloomberg

Global venture capital funds clocked their best-ever returns last year — and they did it while taking only moderate levels of risk, according to eFront’s latest quarterly private equity performance overview.

During the past two quarters, the multiple on invested capital — total value to paid-in, or TVPI — for active venture capital funds approached 1.6x, reported eFront, the software and research firm for alternative investments owned by BlackRock. TVPI is a standard measure of the value a fund creates for investors.

For about four years, TVPIs have ranged between 1.4x and 1.55x. In 2019, according to eFront’s data, the multiple increased from 1.53x in the first quarter to 1.58x by the third quarter of last year.

However, the increase in the multiple, or the value created, took place against a backdrop of surging equity markets last year. That rise in public markets may account for at least some of the record increase in VC performance, the report said. Venture capital funds are valued on a quarterly basis and use publicly traded stocks to help gauge the value of similar private holdings held in the portfolio.

“This expansion happened in the broader context of a very favorable environment during which listed stocks rallied after a correction in Q4 2018,” wrote the authors of eFront’s quarterly study.


The research firm noted in its commentary that in 2019 performance improved for the best funds as well as the worst.

“Not only had the best funds driven the performance, but the less performing ones also managed to improve,” according to eFront. “Thus, all the active funds have benefited from an upward movement, bringing the question of how much of this performance improvement is related to the contagion to start-up valuations of the progression of listed stocks.”

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In the second quarter, venture capital funds recorded a multiple of 1.59x, the highest level in a decade. The multiple decreased nominally to 1.58 in the third quarter.

EFront also reported that the average time-to-liquidity increased slightly, from 3.41 years in 2018 to 3.47 in 2019. Overall, figures from 2018 and 2019 signal that the time needed to generate liquidity for investors is stabilizing at 3.4 years.

The time that venture capital funds have been holding onto portfolio companies has been falling for many years. Still, the economic environment for funds to exit their portfolio companies remains strong, a big factor behind the liquidity metric.

With the surge in valuations in the second quarter, recent vintages of U.S. venture capital funds are now at or above historical averages, according to eFront. The performance of Western European venture capital funds is also increasing, with funds raised since 2010 outperforming the average.