It’s Getting Easier to Avoid Poor Performance in Venture Capital

Finding funds that can really outperform, however, may prove challenging, according to new data from eFront.

Illustration by II

Illustration by II

The return gap between the best and worst venture capital funds is shrinking, according to new data from alternative investment technology firm eFront.

The firm’s latest venture capital report showed that the difference in performance between the top 5 percent and bottom 5 percent of managers has fallen to its lowest level since 2013. In the first quarter of 2018, the gap in returns – as measured by the ratio of total value produced to the amount paid in by investors, or TVPI – was 1.54x, down from 1.67x at the end of last year.

Return dispersion between the best and worst performers has been falling since the end of 2015, when the performance gap peaked at 1.96x. For investors, this means picking a venture capital fund is now the easiest that it’s been in five years, as there is less risk of severe underperformance.

The flip-side is that there are also fewer chances of extreme outperformance.

“For investors, falling selection risk is clearly good news, in admittedly a benign environment,” eFront chief executive officer Tarek Chouman said in a July 3 statement. “However, the reduction of performance spread also implies that top funds could face increased difficulties generating outperformance.”

In March, eFront reported a similar trend occurring among leveraged buyout funds, where the performance spread between the best and worst managers had fallen just below 1.4x in the third quarter of 2017, a record low.

[II Deep Dive: Performance Gap Shrinks Between Best and Worst Buyout Funds]

Within the buyout space, the declining return gap came as overall average performance reached an all-time high, with investors receiving nearly 1.5 times what they had invested during the third quarter.

Venture capital managers have also been delivering some of their best performance ever. In the first quarter, VC funds recorded an average TVPI of 1.45x, slightly down from a record high of 1.49x at the end of last year.

“As the gap in performance between top and bottom funds decreases,” Chouman explained, “VC funds converge toward the pooled average” – which, in the first quarter at least, remains close to all-time highs.