LPs are starting to feel good about venture capital again

Venture capital funds distributed $6.3 billion to limited partners in the third quarter, marking a sharp gain from the prior quarter, according to a new report.

However, capital calls continued to lag, with venture funds bringing in less than $1 for every $2 they gave back to limited partners.

Those were findings of a new report from Cambridge Associates on venture and private equity fund performance. Overall, the report found, venture distributions rose 25%, boosted by a healthy exit environment and strong aftermarket performance for newly public companies. Pre-money valuations of venture-backed companies also rose, particularly for later-stage IT deals.

Six vintage years – 2000 and the years 2004 through 2008 – accounted for more than three-quarters of distributed capital. And all of the largest sectors for investment, such as healthcare, IT, media and software, posted positive returns.

But over the same period, venture funds capital calls failed to show momentum.

Fund managers called just $3 billion from LPs during the third quarter, a level about equal to each of the first two quarters of the year. It was the seventh straight quarter that distributions outpaced contributions, and the ratio of distributions to contributions was the highest since the year 2000.

Three vintage years of 2008, 2011 and 2012 accounted for almost half of the capital called during the quarter.

As for where the money is going, the three largest sectors for venture investment – IT, healthcare and software – accounted for more than 80% of capital invested during the quarter.

Venture and private equity returns lagged those of public markets in the third quarter, an unusually vibrant period for stocks.

But over the long term (10 years and longer), both asset classes outperformed public equities.

The Cambridge Associates LLC U.S. Venture Capital Index returned 6.5% and 14% respectively, for the quarter and year-to-date. The Cambridge Associates LLC U.S. Private Equity Index, meanwhile, rose 5.1%, bringing its year-to-date return to 13.3%.

The closest public market counterpart, the Russell 2000, gained 10.2% and 27.7% for the same periods.

This story first appeared in Venture Capital Journal, a peHUB sister publication

Photo courtesy of ShutterStock