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U.S. Funds Deliver Best VC Returns

Over time, U.S.-based venture capital funds outperform their peers, according to a report from eFront.

  • By Alicia McElhaney

Investors seeking to outperform within venture capital may benefit from targeting funds in the United States, according to a new report. 

The report, published Thursday by private equity software firm eFront, analyzed the risk and returns of venture capital funds in different countries over time. According to eFront, the United States had the best risk-return profile, boasting an internal rate of return of 14.37 percent overall, according to the report.

“By far the largest venture capital market in the world, the United States has continued to develop and in the process, seem to have improved the risk-reward for investors,” the report stated.

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U.S.-based venture capital funds also had a shorter lock-up period than most, according to eFront – the time-to-liquidity was roughly 5.9 years for vintage years 2003 to 2007. This is compared to an average holding period of 6.4 years in the United Kingdom over the same time period.

While the U.S. was the clear winner in eFront’s study, the company warned that it is difficult to compare the venture capital funds of different countries. The United States, for instance, has far more VC firms than other countries, and the firms have been around for much longer. 

However, even after leveling the playing field by only assessing funds after 2001, the U.S. still outperformed, according to the report. 

Chinese venture capital funds also generated “exceptional returns,” according to the report, with an overall internal rate of return was 11.53 percent. However, a “low level of maturity means that risk will increase and internal rates of return will decrease,” the report stated, meaning it is “too early to draw conclusions.”

The report also concluded that Italy’s venture capital market could be appealing for some investors. While the VC funds in the country are some of the riskiest to invest in, they also offered some of the highest returns, according to eFront, with internal rates of return of roughly 6.78 percent for fully realized funds.

“Often overlooked in favor of more advanced European venture capital markets, Italy might be attractive for investors willing to capture attractive performance with moderate levels of challenge in fund selection,” the report concluded.

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