PitchBook Returns Benchmark Fall 2010

Fall 2010
The PitchBook Benchmarking Report
Fund Returns | Fundraising | Capital Overhang
Private Equity | Venture Capital
The PitchBook Dierence

Better Data. Better Decisions.
Private Equity: Data | News | Analysis
Table Of Contents
Private Equity & Venture Capital Overview .......................... 3-4
Average IRR by Vintage ................................................. 3 Private Equity & Venture Capital Horizon IRR ............... 4 Median 1-Year Returns by Fund Type ............................ 4
Private Equity ........................................................................ 5-8

Private Equity Horizon IRR ............................................. 5 1-Year Change in Total PE Portfolio Value ..................... 5 PE Fund Return Multiples by Vintage Year .................... 6 PE Fund Performance Quartiles by Fund Size ................ 6 Private Equity Fundraising ............................................. 7 Private Equity Fundraising Overhang ............................ 7 Selected Closed & Open PE Funds ................................. 8
Venture Capital .....................................................................

Venture Capital Horizon IRR .......................................... 9 1-Year Change in Total VC Portfolio Value ..................... 9 VC Fund Return Multiples by Vintage Year .................... 10 VC Fund Performance Quartiles by Fund Size ................ 10 Venture Capital Fundraising Overhang .......................... 11 Selected Closed & Open VC Funds ................................. 12
9-12
Fund of Funds ........................................................................ 13 Global Private Equity & Venture Capital ................................ 14 About PitchBook..................................................................... 15
COPYRIGHT 2010 by PitchBook Data, Inc. All rights reserved. No part of this publication may be reproduced in any form or by any means graphic, electronic, or mechanical, including photocopying, recording, taping, and information storage and retrieval systems without the express written permission of PitchBook Data, Inc. Contents are based on information from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Nothing herein should be construed as any past, current or future recommendation to buy or sell any security or an oer to sell, or a solicitation of an oer to buy any security. This material does not purport to contain all of the information that a prospective investor may wish to consider and is not to be relied upon as such or used in substitution for the exercise of independent judgment.
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[2]
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Overview
Despite a 24-month period that included the near collapse of the nancial system, a complete freezing of debt markets and a global recession second to only the Great Depression, the private equity and venture capital industries continue to demonstrate their biggest strength of creating long term value in portfolio companies. The results of this value creation can be clearly seen in the impressive returns generated by PE and VC investors across fund vintages, sizes, geographies and investment strategies, as well as the continued commitment of capital from limited partners. Both PE and VC investors, however, continue to face a number of near- and medium-term challenges, such as the need for investment liquidity opportunities and an economy not far from its nadir. Other challenges are more structural, such as years of lackluster average returns for VC and a signicant capital overhang for PE. This report contains detailed information on U.S. and global PE and VC fund IRRs, returns multiples, fund quartiles, fundraising and capital overhang to provide a complete picture of each industrys performance over the last decade. A number of observations are apparent from the data, including the outperformance of public markets by PE, the even stronger performance from global funds, the critical importance of fund selection and the eects of the overall economy on private equity and venture capital returns.
Average IRR by Vintage Year

Average IRR (net of fees) by vintage year & fund type. Funds newer than 2006 are not displayed since they have yet to realize a signicant portion of their investments (J-curve eect).
Vintage Year
Source: PitchBook
Private equity funds have had ve straight vintages with IRRs averaging over 10%. Mezzanine funds are the second best performers with returns not too far below PE funds for most vintages followed by fund of funds which track close to the average IRR of all fund types. The average venture fund IRR has been negative for every vintage since 1999, bottoming out with the 1999 vintage at -11.6% and peaking with the 2003 vintage at -3.4%.
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[3]

Private Equity & Venture Capital Horizon IRR
Sources: PitchBook Russell Investments
The 1-, 3- and 5-year Horizon IRRs as of 3/31/2010 for private equity and venture capital are displayed in this chart along with the 1-, 3- and 5-year annualized returns for public equities markets. The chart shows that over the last year the recent rise in public markets has caused PE and VC funds to underperform the public markets. However, PE and VC funds are long-term investors. Thus, a better measure of the industrys performance is their 3- and 5-year returns, which show both PE and VC outperforming the public market benchmarks. Private equity in particular outperforms with a 3-year IRR of 1.5% and a 5-year IRR of 14% versus -6% and 0% returns for public markets over the same time periods.
Median 1-Year Returns by Fund Type

Median 1-Year Rolling Horizon IRR by Fund Type
Source: PitchBook
The charting of 1-year returns over the last decade provides an interesting look at the performance of the industry in dierent economic climates and across all parts of the business cycle. The impact of the recent nancial crisis is clear with all funds, except mezzanine, turning in a 1-year IRR for 2008/2009 of -18%. The middle of the decade, when the U.S. economy was strong and expanding, provided an ideal environment for investors with ve straight years of returns between 5% and 15.5% for most fund types.
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[4]

Private Equity
The early and mid-2000s were favorable years for private equity investing as displayed by its industry-leading average IRRs year after year, impressive average return multiples and top quartile returns in excess of 17%. The past two years have been dicult for PE though, with most portfolios taking signicant writedowns as shown by below-par TVPI for most non-mature funds. But with a 30.8% rise in PE portfolio values and a 14% 1-year IRR for the year ending 1Q 2010, performance is rebounding, signaling that conditions are beginning to return to some state of normalcy. The data also shows that a nuber of key challenges remain for PE, including nding liquidity opportunities, growing portfolio companies and putting to work the $485 billion of dry powder amassed from fundraising over the last the last eight years.
Private Equity Horizon IRR

This graph shows the 1-, 3-, and 5-year Horizon IRRs of PE funds by fund size as of 3/31/2010. For the 12 months ending 3/31/2010, the under $100M funds had the best 12 months with an IRR of 20%. Looking longer term, a better judge of actual PE fund performance, the $100M to $250M bucket is leading signicantly with a 5-year horizon IRR of 21% with the rest of the fund groups returning around 14%. The eects of the nancial crisis on PE returns can clearly be seen with the steep drop in 3-year returns for all fund types from their 5-year return level.
Source: PitchBook
Weighted Change in NAV by Fund Size The value of the portfolios held by private equity funds rose by 30.8% from 1Q 2009 to 1Q 2010 (represented by the yellow bars on the right and left). The 30.8% increase can be explained by a 28.6% rise in portfolio valuations and a net increase in new investment (investment minus exits) of Starting 2.2%. Funds over $5 billion accounted for Value 70% of the total increase in value over the past year (blue bars). This large increase relative to the other fund sizes is likely due to mega-funds reliance on public markets for portfolio company valuations, which, as shown on page 4, were up roughly 40% during this time period.
1-Year Change in Total PE Portfolio Value
Ending Value
Source: PitchBook
*For the unweighted analysis please contact PitchBook Research at research@pitchbook.com www.pitchbook.com
[5]

PE Fund Return Multiples by Vintage Year

This graph shows the distributed over paid-in (DPI), remaining value over paid-in (RVPI) and total value over paid-in (TVPI) of private equity funds by vintage years as of 3/31/2010. Mature private equity funds are well into the positive; however, for the 19992002 vintages that are nearing the end of their fund lives, their ultimate return will be strongly aected by the exits of their remaining portfolio companies (the red area in the graph). As would be expected, fund vintages 2005 and younger are still in the process of investing and improving portfolio companies, so TVPI is at 1x or below with very little distributed back to limited partners.
J-Curve
Source: PitchBook
PE Fund Performance Quartiles by Fund Size

The 25th percentile, median and 75th percentile IRRs for mature (pre-2006) U.S. private equity funds by size. For example, funds over $5 billion have a median return of 4.2% with a 25th percentile of -7% and a 75th percentile of 12.88%.
75th Percentile Median 25th Percentile
Source: PitchBook
The data reveals a lack of variance between the IRR quartiles of dierent private equity fund sizes, suggesting that no single fund size seems to signicantly outperform or underperform the rest of the industry. The importance of fund manager selection, however, is clearly illustrated by the spread between lower and upper quartile funds regardless of fund size. For example, the lower quartile funds for the $100M to $250M size range have returns of below -4.3% versus the top quartile funds which have IRRs of above 15.6%. Mature PE funds as a whole are strong performers with well over half of all funds posting positive returns and half with returns of over 7.7%.
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[6]

U.S. Private Equity Fundr aising

Fundraising since the third quarter of 2009 continued to trend upward with 22 funds totaling $32.5 billion closed during the second quarter of 2010, rising from 21 funds totaling $21 billion closed during the rst quarter. This trend is good news for the PE industry as it shows a continued belief in the asset class and its long-term investment prospects from limited partners. However, fundraising levels are still below the totals of recent years and will likely remain so for the near future as rms and LPs digest the $777 billion that was raised by U.S. private equity funds from 2006 through 2008.
Source: PitchBook
U.S. Private Equity Fundr aising Overhang

This graph shows the capital overhang of U.S. private equity funds by fund size and vintage year as of 3/31/2010. The U.S. private equity dry powder is estimated to currently be $485 billion, $425 billion of which is attributable to funds raised since the beginning of 2007. Funds above $1 billion comprise the largest portion of the overhang at 82% or $400 billion. Middle-market focused funds have a much smaller capital overhang of roughly $85 billion, representing about 18% of the total overall overhang. This PE capital overhang will likely continue to aect fundraising, investment and exits for years to come.
Source: PitchBook www.pitchbook.com
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Selected Funds Closed in 2010 Fund

Madison Dearborn Capital Partners VI Avista Capital Partners II Resource Capital Fund V Starwood Capital Global Hospitality Fund II Sankaty Middle Market Opportunities Fund Lovell Minnick Equity Partners III AEA Mezzanine Fund II Prospect Partners III Argosy Investment Partners IV The Azalea Fund III
Firm
Madison Dearborn Partners Avista Capital Partners Resource Capital Funds Starwood Capital Group Sankaty Advisors Lovell Minnick Partners AEA Investors Prospect Partners Argosy Capital Azalea Capital
Fund Size ($M)

$4,100 $1,800 $1,000 $956 $900 $455 $420 $200 $180 $83 Source: PitchBook
Selected Funds Currently in Market Fund

Mega-Funds: Crestview Partners II Trident V Blum Strategic Partners IV Middle-Market Funds: Arlington Capital Partners II Snow Phipps II Forest Hill Partners Thayer Hidden Creek Partners II Lower-Middle Market Funds: Alpine Investors Fund IV Riverlake Equity Partners Fund II
Firm
Crestview Partners Stone Point Capital Blum Capital Partners Arlington Capital Partners Snow Phipps Group Forest Hill Partners Thayer Hidden Creek Partners Alpine Investors Riverlake Partners
Target Size ($M)

$2,500 $2,250 $1,500 $750 $700 $300 $250 $100 $100
Source: PitchBook
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[8]

Venture Capital
Venture capital investors and their portfolio companies have faced a number of challenges over the last 10 years, including a shrinking pool of exit opportunities, a volatile business environment and an overabundance of capital. These and many other issues have combined to result in a decade of stagnant returns averaging on the wrong side of 0%. The result has been a decrease in investment in the industry compared to other alternative assets and increasing calls for venture investors to eect fundamental changes in the way they do business. There are bright spots for venture capital however, including the 14% rise in VC portfolio value this past year and the positive returns being generated by investors across a signicant number of funds, especially through upper quartile funds, which have returns well into the 15% range and higher.
Venture Capital Horizon IRR

The Horizon IRRs for venture capital funds over the last 1, 3 and 5 years paints a less-than-idyllic picture of average returns for venture capital funds of all sizes. When categorized by fund size and time period, the average IRR for VC funds is at best 7% and at worst -18%. Looking at the 5-year IRR is the best measure of the industrys performance due to its long-term investment horizon, and it shows that the average return is around 0%. The one outlier is the $500M-$1B fund group, which at 3% is just above what the public markets returned over the same time period. The Horizon IRR is a useful guide for gauging the interim progress of a fund grouping, but only the end-of-life IRR characterizes the true return.
Source: PitchBook
1-Year Change in Total VC Portfolio Value

Weighted Change in NAV by Fund Size Portfolio valuations for venture capital funds rose over 14% for the 12 months ending 3/31/10 with the biggest contribution coming from funds between $150 million and $250 million. The primary driver for this increase in value is somewhat obscured behind mark-to-market accounting, capital calls and fund distributions, but, with resurgent public markets and a dearth of both capital calls and distributions, the change in NAV seems to be largely attributable to rising valuations from the public markets and portfolio company growth. As deal ow returns over the coming quarters, changes in portfolio value will increasingly rely on the capital calls made by the general partner.
Starting Value
Ending Value
Source: PitchBook
*For the unweighted analysis please contact PitchBook Research at research@pitchbook.com www.pitchbook.com
[9]

VC Fund Returns Multiples by Vintage Year

A look at the average TVPI, RVPI and DPI for venture capital funds by vintage year shows that the average VC fund for almost all vintages is valued a bit below cost. The chart, however, clearly shows that VC funds are holding onto a signicant portion of their portfolio as evidenced by the large fraction of RVPI (red portion of the bars) extending all the way back to the 2000 vintage. The lukewarm IPO and exit environment over the last few years has forced investors to retain their investments longer than normal in hopes of better exit opportunities and valuations. Without these exits, it is still too early to pass judgment on VC performance, since the majority of the last decades VC investments remain unrealized.
J-Curve
Source: PitchBook
VC Fund Performance Quartiles by Fund Size

The 25th percentile, median and 75th percentile IRRs for mature (pre-2006) U.S. venture capital funds by size. For example, funds over $1 billion have a median return of 1.56% with a 25th percentile of -4.5% and a 75th percentile of 2.89%.
25th Percentile 75th Percentile Median
Source: PitchBook
This chart shows that it is not all bad news for VC returns, as over half of all VC funds have positive IRRs and the $150M-$250M fund group has the highest 75th percentile point of any PE or VC fund group at 20.4%. When looking at other VC performance data, it is important to keep in mind that roughly half of all VC funds do have positive returns and that, as this chart shows, the upper quartile funds usually have very strong returns. Additionally, this chart illustrates the importance of fund selection, as the dierence between the bottom and top quartile funds for VC is as much as 27 percentage points.
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[10]

U.S. Venture Capital Fundr aising Overhang
Source: PitchBook
U.S. Venture capital rms continue to hold $81.66 billion of dry powder in reserve, which is nearly 51% of the total capital raised by VC funds since the beginning of 2003. 2003 and 2004 vintages are almost fully invested with just a small portion of the capital reserved for follow-ons. 2005 and 2006 vintages also appear to have invested most of their capital, but these funds have a larger store of dry powder for follow-on investments remaining. Funds sized between $500M and $1B have the largest overhang at $25.2 billion, followed by funds sized between $250M and $500M with $24.6 billion.
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[11]

Selected Funds Closed in 2010 Fund

New Enterprise Associates 13 Battery Ventures IX Redpoint Ventures IV Venrock Associates Fund VI Draper Fisher Jurvetson Fund X Founders Fund III Greycroft II Glynn Partners II Alerion Investment Partners II Early Stage Partners II
Firm
New Enterprise Associates Battery Ventures Redpoint Ventures Venrock Associates Draper Fisher Jurvetson The Founders Fund Greycroft Partners Glynn Capital Management Alerion Partners Early Stage Partners
Fund Size ($M)

$2,500 $750 $400 $350 $350 $250 $130.7 $111 $70.7
Source: PitchBook
$55
Selected Funds Currently in Market Fund

DAG Ventures IV TPG Biotechnology Partners III Polaris Venture Partners VI Adams Capital Management IV Onset Ventures VI HLM Venture Partners III NewSpring Healthcare II SSM Partners IV Prolog Fund III Saratoga Ventures VI
Firm
DAG Ventures TPG Ventures Polaris Venture Partners Adams Capital Management ONSET Ventures HLM Venture Partners NewSpring Capital SSM Partners Prolog Ventures Saratoga Ventures
Target Size ($M)

$600 $550 $400 $300 $250 $200 $150 $125 $50
Source: PitchBook 1-877-267-5593 demo@pitchbook.com
$25
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[12]

Fund of Funds
Private equity and venture capital fund of funds oer a number of benets to their limited partners such as diversication, access to top funds and professional fund selection and management. The data on U.S. fund of funds shows that they, on average, tend to outperform venture capital funds but underperform private equity funds, yet their returns show a high correlation to the movement of both venture and private equity. To see this, refer to the charts on pages 3 and 4 displaying average IRR and rolling 1-year IRR. The two charts below provide a closer look at the performance data for fund of funds by fund size and vintage year. All fund of fund strategies are aggregated together, including private equity, venture capital and secondary.
Fund of Funds Horizon IRR

Looking at the 3- and 5-year performance, the most notable trend to emerge is the divergence in performance between funds under $250M and over $5B (5-year return of 1%) from funds between $250M and $1B (5-year return of 9%-14%). The 5-year return for the two weakest fund sizes is close to the public market returns shown on page 4, while the $500M to $1B fund groups Horizon IRR of 14% is equal to the average 5-year return for the top PE fund size groups shown on page 5.
Source: PitchBook
US Fund of Funds Return Multiples by Vintage Year
Source: PitchBook
Fund of fund multiples show strong returns for mature funds with average fund TVPI multiples all above 1x and as high as 1.42x. The RVPI for the mature vintages remains relatively high and, like PE and VC funds, a signicant part of the nal returns will be dependent on the remaining exits in the underlying fund portfolios. Fund of funds still early in their lifecycle, though, have an average TVPI that outperforms PE and VC funds for every vintage year since 2005.
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[13]

Global Private Equity

The charts below display performance multiples (TVPI, RVPI and DPI) for private equity and venture capital funds primarily investing in companies located outside of the United States. The TVPI multiple for global funds reveals that they are actually outperforming U.S.-focused funds for 5 of the mature PE vintages and 6 of the mature VC vintages since 1998. Looking closer at this outperformance reveals that for these vintage years global PE funds average a .25x higher return and for VC the return is closer to 0.5x higher. For every single vintage year from 1998 through 2004, global PE and VC funds also have a higher DPI ratio, meaning they have distributed a higher portion of their portfolio back to their LPs than U.S. funds. Conversely, for younger funds (2006-2010), global partnerships are underperforming U.S.-focused funds across nearly every vintage for both PE and VC.
Global PE Fund Multiples by Vintage Year

J-Curve
Mature global private equity funds are returning more than their U.S. counterparts with an average TVPI of 1.6x, RVPI of 0.4x and DVPI of 1.2x. The 2001 vintage was particularly impressive with a TVPI of 2.41x, making it the highest returning vintage for both U.S. and global PE and VC funds. Global funds are also outperforming U.S. funds in terms of their much higher ratio of distributed value as compared to total value. Global funds also begin to realize investments and distribute returns nearly a year earlier than their American counterparts.
Source: PitchBook
Global VC Fund Multiples by Vintage Years

Global venture capital funds are currently performing better than U.S. VC funds for all mature vintages with an average TVPI of 1.25x, RVPI of 0.6x and a DPI of 0.65x. The 1999 and 2002 fund vintages are doing especially well with an average TVPI of 1.63x. Global VC funds are slower to exit than global PE funds but do appear to be slightly faster than their U.S. VC counterparts. For mature global VC funds, like U.S. VC funds, their relatively high RVPI ratio shows a signicant amount of value still being held in portfolios
J-Curve
Source: PitchBook
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[14]

Your Single Source for Quality Private Equity Data
Only PitchBook tracks the entire private equity lifecycle and every party involved: limited partners, inancial sponsors & investors, target companies, service providers and key professionals. By dynamically linking these parties, PitchBook makes it easy to identify relationships and networks. Additionally, it actively researches target companies the entire time they are in an investors portfolio, so youll always be up-to-date on the crucial details of a transaction and the companys progress. The PitchBook Platform contains information on over 25,000 private equitybacked companies, investors and service providers, across every industry segment, every deal size and every private equity deal type from announcement to exit.
Broadest Private Equity Coverage
PitchBooks mission is to provide hard-to-ind information on private equity: the details you can only ind through direct contact with key players and painstaking background research.
Deepest Level of Detail
Deal monitoring and research through the entire lifecycle. Without exception, PitchBook actively researches and reports on companies from announcement to inal exit. PitchBook captures the full inancing story, much more than just a snapshot of the deals announcement.
What Makes PitchBook Different
PitchBook researches deal amounts and valuations, target company inancials and price multiples, capitalization structures, deal terms, investor information and service provider contact information. It also tracks deal stakeholders and participants not just inancial sponsors and investors, but also the many other inancial, legal and advisory irms associated with taking a deal through to completion.
Full spectrum coverage. PitchBook covers the full spectrum of private equity deals: all sizes, all industries and all types.
manpower and resources necessary to make this happen.
No shortcuts. It takes meticulous research to produce complete, consistent, timely and accurate information, and we devote the
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PitchBook Returns Benchmark Fall 2010

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Fall 2010

The PitchBook Benchmarking Report

Fund Returns | Fundraising | Capital Overhang

Private Equity | Venture Capital

The PitchBook Dierence

Private Equity ........................................................................ 5-8

Venture Capital .....................................................................

The PitchBook Dierence

Average IRR by Vintage Year

The PitchBook Dierence

Private Equity & Venture Capital Horizon IRR

Sources: PitchBook Russell Investments

Median 1-Year Returns by Fund Type

The PitchBook Dierence

Private Equity Horizon IRR

1-Year Change in Total PE Portfolio Value

The PitchBook Dierence

PE Fund Return Multiples by Vintage Year

PE Fund Performance Quartiles by Fund Size

The PitchBook Dierence

U.S. Private Equity Fundr aising

U.S. Private Equity Fundr aising Overhang

Source: PitchBook www.pitchbook.com

The PitchBook Dierence

Selected Funds Closed in 2010 Fund

Fund Size ($M)

Selected Funds Currently in Market Fund

Target Size ($M)

The PitchBook Dierence

Venture Capital Horizon IRR

1-Year Change in Total VC Portfolio Value

The PitchBook Dierence

VC Fund Returns Multiples by Vintage Year

VC Fund Performance Quartiles by Fund Size

The PitchBook Dierence

U.S. Venture Capital Fundr aising Overhang

The PitchBook Dierence

Selected Funds Closed in 2010 Fund

Fund Size ($M)

Selected Funds Currently in Market Fund

Target Size ($M)

The PitchBook Dierence

Fund of Funds Horizon IRR

US Fund of Funds Return Multiples by Vintage Year

The PitchBook Dierence

Global Private Equity

Global PE Fund Multiples by Vintage Year

Global VC Fund Multiples by Vintage Years

The PitchBook Dierence

Your Single Source for Quality Private Equity Data

Broadest Private Equity Coverage

Deepest Level of Detail

The PitchBook Platform Places Powerful Intelligence at Your Fingertips:

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