LPs with meaningful allocations to venture capital were likely pleased with the asset class’s performance in 2019. The year saw returns from VC reach record levels, according to an analysis by eFront.
But when the covid-19 pandemic erupted this year and the stock market took a nosedive, LPs prepared for their venture capital returns to also turn red. These fears were short-lived. Many late-stage funds took substantial mark-downs in Q1, only to mark them back up the following quarter.
This pattern is readily evident in the quarterly performance of the Washington State Investment Board’s VC and growth equity portfolio. The majority of WSIB’s venture and growth equity funds took an internal rate of return hit from the fourth quarter of 2019 to Q1 of this year.
For example, Sequoia Capital’s third global growth fund had a 9.49 percent IRR at the end of last year and a 6.05 percent IRR as of Q1 2020, representing a major hit to the firm’s $8 billion fund and WSIB’s $350 million commitment to it.
But a quarter later, Sequoia’s flagship fund recorded a net IRR of 16.07 percent. It not only made up lost ground, but it also nearly doubled its previous record IRR.
Other vehicles in WSIB’s portfolio that show dramatic recoveries post-Q1 markdowns are TCV’s ninth and 10th funds.
LPs and GPs knocked down the values of VC funds in anticipation that the pandemic would negatively impact the underlying assets. But it quickly became evident that many VC–backed companies were accelerating amid widespread shutdowns.
A boon for late-stage VC
“Covid-19 essentially hit fast-forward on many long-term growth-equity trends,” said Miguel Luiña, head of global venture and growth equity for Hamilton Lane.
While early-stage start-ups are still working on product-market fit, many late-stage companies are now reaping the majority of rewards from the shift from analog to digital, he explained in an earlier interview with Venture Capital Journal.
Hamilton Lane, which happens to be WSIB’s advisor, sees strong opportunities in the late-stage and growth-equity market segments.
“Our client base is particularly interested in increasing exposure to growth equity,” Luiña said.
This late-stage and growth equity heavy portfolio appears to have benefitted WSIB this year.
Amid the pandemic, venture capitalists were more likely to support late-stage companies, which have less perceived risk than their early-stage counterparts. And the data proves this. 2020 is on pace to set record late-stage deal values while early-stage investing activity is down from last year, according to Q3 data from PitchBook and the National Venture Capital Association.
In addition to TCV and Sequoia’s mega-fund, WSIB’s growth equity portfolio includes vehicles from TPG and Insight Partners.
The $116 billion Washington State LP had exposure to earlier-stage funds, including Union Square Ventures, Polaris Venture Partners and New Enterprise Associates in the early 2000s, but decided not to re-up with these firms following the global financial crisis. However, WSIB held on to its relationship with Menlo Ventures, a firm that invests in early and late-stage companies.
Out of the more than a dozen VC and growth equity funds in WSIB’s portfolio, only Menlo Special Opportunities fund, a young $250 million 2016 vintage vehicle aimed at supporting Series B and C companies, did not recover lost IRR ground from Q1 to Q2, according to WSIB’s latest quarterly report.