LPs See Red In Latest VC Fund Returns –

Limited partners in U.S. venture and buyout funds had a blue – make that red – Christmas.

One-year returns on VC investments slinked in at 27.8% in the fourth quarter of 2001, according to a report by Venture Economics (publisher of Venture Capital Journal) and the National Venture Capital Association.

The biggest losers were early stage venture funds, which reported 33.9% returns. Later-stage VCs fared better, showing a -20% return, while buyout funds posted a -14.5% return.

The released data is compiled quarterly by tracking the performance of 1,400 U.S.-based venture capital and buyout funds formed since 1969. Returns are calculated net to investors after fees and carried interest.

On the upside, the numbers are an improvement over the third quarter of 2001. One-year venture capital returns are up approximately 14% from the third quarter, with both buyouts and mezzanine fund returns showing improvement.

The short-term results for both venture and buyout funds over three-month, six-month and nine-month investment horizons also improved. The one-year return in Q4 improved from 32.4% in Q3 2001.

Results over longer periods, however, are down slightly.

“We still have a ways to go,” says Peter Lawrence, managing partner with Stamford, Conn.-based Flag Venture Partners. “Any continued improvement will be tied to how soon we see customer traction and increased spending in the IT and communications sectors. Only then will we see portfolio companies be [consistently] able to raise subsequent rounds of funding and possible exits.”

As for how much money has actually been given back to investors, the report shows that younger funds have struggled to give money back to their LPs. Funds formed in 1999 and beyond have paid virtually nothing back to their investors, according to Venture Economics.

The research firm notes that despite the lackluster performance, five- and 10-year returns are still up and exceed the performance of the public markets. The five-year return came in at 35.9%, while the 10-year return posted a gain of 26.4%

The downward trend in returns is “inevitable,” as the triple-digit returns of the boom years give way to “sustainable levels that are more in line with historical averages,” says John Taylor, vice president of research for the NVCA.

Taylor adds that it “will take at least several quarters, if not several years, for private venture-backed companies to mature to the point when they are ready for an IPO or to be acquired by a larger entity.”

Guess that means we’ll be seeing negative returns for a while.