Much has been said about the value of investing in top quartile venture capital funds. Empirically, the numbers bear this out. In the early days of the modern venture capital industry, the spread between the returns of upper and lower quartile funds was relatively narrow. In 1982, for example, the spread was as low as 424 basis points, expanding to 74.3% in 1996, the highest level reached. Spreads fell back to a still meaningfully wide 11.3% in 2007 before blowing out to 44.5% in 2012.
In absolute terms, on average, lower quartile venture capital funds delivered negative returns every year from 1997 through 2006 as well as in vintage years 2011 and 2012. Upper quartile venture capital funds, on the other hand, have not delivered negative returns since the launch of the Cambridge Associates benchmark in 1981.
Key takeaway: The persistence of returns is a big difference between private and public market investors. If they invest consistently within their styles and processes, for example, virtually all top-performing mutual funds tend to underperform their peers for varying time periods as their styles fall out of favor. Top performing venture capital firms, on the other hand, tend to consistently outperform their bottom performing peers - as they are typically able to leverage their access to the best entrepreneurial talent, technologies/ applications, and ultimately deals over time. This access comes as a result of the high level of support and expertise that they consistently bring to their portfolio companies and the strong resulting reputations that they've built within the entrepreneur community. In venture capital investing, success begets further success.
The material provided here is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.
This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management. This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.
Opinions and statements of financial market trends that are based on current market conditions constitute judgment of the author and are subject to change without notice. The information and opinions contained in this material are derived from sources deemed to be reliable but should not be assumed to be accurate or complete. Statements that reflect projections or expectations of future financial or economic performance of the markets may be considered forward-looking statements. Actual results may differ significantly. Any forecasts contained in this material are based on various estimates and assumptions, and there can be no assurance that such estimates or assumptions will prove accurate.
Investing involves risk, including possible loss of principal. Past performance is no guarantee of future results. All information referenced in preparation of this material has been obtained from sources believed to be reliable, but accuracy and completeness are not guaranteed. There is no representation or warranty as to the accuracy of the information and Penn Mutual Asset Management shall have no liability for decisions based upon such information.
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