Professor Steve Kaplan, an economist from University of Chicago, recently did a study to measure performance of VC and PE returns over 10 years from 2003–2013 compared to S&P 500 and here are his findings.
Steve Kaplan and Antoinette Schoar designed Kaplan Schoar Public Market Equivalent (aka. KS-PME). Common methods to measure fund performance are - Annualized IRR and Multiple of Invested Capital (MOIC) which both have their drawbacks since they both don’t control for market movements. KS PME was designed to be more of a market-adjusted multiple so you can understand how the funds are doing compared to S&P 500.
IRRs, Multiples and PMEs vary substantially across vintage years.
— PMEs well above 1.0 through 1998.
— PMEs below 1.0 1999 to 2002.
— PMEs above 1.0 since 2003.
Which means that 1.2 means 20% better over life of fund. That is a market adjusted MOIC.
How has PE done relative to VC in the same 10 years?
— For 1999 to 2005 vintages, PE did much better.
— For post-2006 vintages, VC has done better.
Why? has PE not done better than VC in recent years?
The answer is in the following finding and two slides below —
Performance in VC & PE is significantly negatively related to fundraising
While VC fundraising activity increased in 2016 but not to crazy levels like in 1999–2000. PE activity on the other hand has been close to all-time highs for last 5 years, so relatively more capital has gone in PE than VC which might explain the large deals sizes and high valuations in the later stages.
Going forward how is the outlook for VC funds?
Here is the conclusion from Steve Kaplan:
■ Despite all the attention to start-ups / VC, commitments to stock market value not particularly high relative to historical means.
■ VC commitments are higher in 2016, but nowhere near tech boom. — Commitments to PE are at historically high levels.With the extra $, returns should be lower, but not in the danger zone we were in from 1998 to 2001, and not so bad as 2006 and 2007.
■ Accordingly, Steve continues to feel better about VC than about PE and expects VC to beat S&P500 for the foreseeable future.
Thank you to Steve Kaplan for helping me put this article together and letting me use his findings. Here is the complete presentation.
PS — KS PME is adopted by likes of Calpers to measure fund performance