Overhang Explained –

Thomson Venture Economics refined its methodology this year for determining the overhang by taking into account two complicating factors-downsized funds and liquidated and/or defunct funds. When a fund downsizes it reduces the capital committed by LPs, thus decreasing the overall overhang. Thomson VE accounted for this phenomenon by reducing each vintage year’s committed capital by the downsized fund amount. That was most significant in 2001 and 2002.

Likewise, Thomson VE reduced committed capital for periods after the liquidation and/or dissolution of a fund. The net effect of these two refinements is that prior estimates have been revised.

For a detailed discussion of overhang and the methodologies used by Thomson VE to estimate the figure, see “Dry Powder Dilemma” in the May 2002 issue of VCJ. For now, suffice it to say that calculating the overhang is more complicated than simply comparing investments to commitments. Investments come from other sources than committed venture capital. Those sources include corporate venture groups that have no committed capital but are evergreen investment vehicles, buyout funds that invest in venture deals but have become less significant over the past four years, and investment by foreign groups. In all these cases the investment is coming from other sources than capital committed to U.S. venture capital funds.

Thomson VE used its performance database, which tracks the takedowns (capital calls, paid in capital, etc.) from limited partners and the commitment of those LPs. This gives a much more accurate estimate of how much remains in the committed capital pool. -J.R.