Private Equity Performance Continued Downward Trend in Q3 2001

Business Wire, Feb 19, 2002

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 19, 2002

As expected, Private Equity Performance Index results for Q3 2001 showed a continued downward trend for the third consecutive quarter, according to Venture Economics and the National Venture Capital Association. This downward trend can be attributed to decreasing technology company valuations, public market volatility, and a weak economy.

One-year returns for venture capital funds fell from -18.2% at the end of Q2 2001 to -32.4% at the end of Q3 2001. When looking at longer time frames (3-year through 20-year), performance was minimally affected during the third quarter. One-year returns for all private equity, including venture capital, buyouts and mezzanine funds, showed a performance of -21.4% ending 9/30/2001. That compares with one-year, public market returns of -64.4% on the NASDAQ and -31.4% on the S&P.

"The year 2001 was a very difficult one for the venture capital community. The combination of significant market volatility, declining valuations and much uncertainty forced venture capitalists to rethink investment strategies and return to investing fundamentals. We are now beginning to sense some optimism among the venture community, which will hopefully translate into better performance figures in the future," commented Mark Heesen, president of the National Venture Capital Association.

Figure 1. Venture Economics' US Private Equity Performance Index(PEPI)
      Investment Horizon Return as of
                              9/30/01

Fund Type             3 Mo  6 Mo        1 Yr 3 Yr  5 Yr  10 Yr  20 Yr
Early/Seed VC        -12.8 -16.9       -36.3 81.0  53.9   33.0   21.5
Balanced VC           -9.8 -11.7       -30.9 45.9  33.2   24.0   16.2
Later Stage VC        -3.9  -7.5       -25.9 27.8  22.2   24.5   17.0
All Venture          -10.0 -13.3       -32.4 53.9  37.9   27.4   18.2
All Buyouts           -8.0  -6.9       -16.1  2.9   8.1   12.7   15.6
Mezzanine             -2.0  -0.9         3.9 10.0  10.1   11.8   11.3
All Priv Equity       -8.2  -8.7       -21.4 16.5  17.9   18.8   16.9

- Venture Economics' Private Equity Performance Index is calculated quarterly from Venture Economics' Private Equity Performance Database (PEPD). The PEPD tracks the performance of 1400 US venture capital and buyout funds formed since 1969. Returns are net to investors after fees and carried interest. Three and 6-month returns are un-annualized.

As the chart below shows, portfolio valuations fell to $51.6 million in Q3 2001 from their high of $93.1 million in Q4 2000. The drop in portfolio valuation indicates that many venture capitalists have taken a conservative outlook regarding the future by "writing down" the values of the companies in their portfolios.

Figure 2.  Quarter End Company Valuations

                (in Millions)
                      Average      Median
  Quarter End       Valuation   Valuation
    2000 Q3            87.1        38.0
    2000 Q4            93.1        44.4
    2001 Q1            65.2        29.7
    2001 Q2            59.9        30.9
    2001 Q3            51.6        25.9

Vintage Year Results

With company valuations steadily declining since 2000 and distributions hard to reach due to sluggish IPO and M&A markets, young funds are finding it difficult to reach the break-even point. For example, Figure 3 reveals the portion of returns that has actually been realized as distributions versus unrealized. The DPI, or distribution to paid in ratio, for funds formed in 1999 have only returned 15% of their invested capital. However, the 1999 funds are only worth 76% of the amount invested, indicating that younger funds are barely breaking even.

Figure 3. Vintage Year Results for Selected Years

Venture Funds as of 9/30/2001
                   Annualized    Realized  Unrealized
      Year of          Return      Return      Return
         Fund           Since       (DPI)      (RVPI)
                    Inception
    Formation       (percent)     (times)     (times)
         1990            27.5        2.59        0.43
         1994            42.1        2.51        0.97
         1999            -6.4        0.15        0.76
  All Vintage           18.0%        1.39         .68
        Years

Vintage year results are performance results measured for funds by the year they started investing. These returns are driven by both realized exits (capital gains) and unrealized valuations. Unrealized returns are based upon interim valuations provided by the individual venture funds. These valuations permit IRR analysis during the life of a portfolio but do not affect the ultimate payout to the investors. Analyzed in terms of the original investment in the venture funds by the limited partner investors, 1.39 times original investment has been realized and .68 times the original investment is based upon portfolio valuations.

About Venture Economics

Venture Economics, a Thomson Financial company, is the foremost information provider for equity professionals worldwide. Venture Economics offers an unparalleled range of products from directories to conferences, journals, newsletters, research reports, and the Venture Expert(TM) database. For over 40 years, Venture Economics has been tracking the venture capital and buyouts industry. Since 1961, it has been a recognized source for comprehensive analysis of investment activity and performance of the private equity industry. Venture Economics maintains long-standing relationships within the private equity investment community, in-depth industry knowledge, and proprietary research techniques. Private equity managers and institutional investors alike consider Venture Economics information to be the industry standard. For more information about Venture Economics, please visit http://www.ventureeconomics.com.