Examining horizon net IRRs for private equity fund strategies is a useful way to measure how the industry is performing over defined periods of time. Preqin calculates horizon IRRs over one, three, five and ten years, as well as one- and three-year rolling horizons. This article compares the pooled net IRRs for venture capital funds over these various time horizons.
Horizon IRRs are calculated using the fund’s net asset value as a negative outflow at the beginning of the period, and any cash paid or received during the period and the fund’s residual value as a positive inflow at the end of the period. Preqin’s Performance Analyst online service uses cash flow data for over 2,500 private equity funds to calculate horizon IRRs over defined periods of time.
Out of the one-, three-, five- and ten-year horizons to 30 June 2013, venture capital funds have performed best over three years, producing a return of 9.0%. Over the one-year ending 30 June 2013, venture capital funds returned 6.5%, followed by 4.5% over the ten-year period and 1.7% over the five-year period.
In comparison to all other private equity strategies, including buyout, fund of funds, mezzanine and distressed private equity, venture capital has produced the lowest returns over all time horizons to 30 June 2013. Due in part to the dot-com bubble and subsequent crash, venture capital funds have been unable to reproduce the double digit returns experienced in the 90s. However, promisingly, the returns earned by venture capital funds over the shorter time horizons of one- and three-years are greater than those over the longer time horizons of five- and ten-years, suggesting potential signs of recovery for this fund strategy.