Samir Kaji’s Post

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CEO @ Allocate | MBA, Venture Capital, Finance

***VC vs Private Equity data by the numbers: Alternatives have become a staple of HNW portfolios. It makes sense given the size of the private markets (87% of companies w/$100MM+ in revenues are reportedly still private). PE and VC are two of the largest areas of investment, with PE generally serving mature CF+ companies while VC serving the growing innovation economy. Although these two are not mutually exclusive when building a portfolio, wanted to do a comparative analysis (using Pitchbook data) to see the relative risk/return differences. *Caveat 1: Benchmarks often have survivorship bias, and limited sample sizes.  *Caveat 2: We are just using the publicly available PB benchmarks here, although our analysis shows similar data using other benchmarks. Takeaways: - A VC fund portfolio needs 10-20% of the portfolio to be top decile (with 10 funds, 1-2x) to fully justify risk/return. From a DPI standpoint, this is likely through smaller funds, but not necessarily on Net IRR (later reserve checks have shorter time to liquidity vs. small funds that incline toward Seed/A) - Top Decile VC is the holy grail of alts at 3x+ Net TVPI and 40%+ Net IRR.  - PE on average has a 3-4 year headstart on liquidity (4 years on average vs. 7 years) - Top Quartile VC vs. PE is essentially very similar when taking into account timing of cash flows (only 2% delta in Net IRR, TVPI multiple difference of .3x). Slight outperformance in VC. - Bottom Quartile: This is the death zone for VC, and PE is definitely far safer as PE still returns 1x capital (vs. .77x for VC). Manager selection and access in VC is so substantially critical, and why adverse selection in VC (funds, but also directs) is such an issue for investors looking to invest in the asset class. (1996-2021: 26 years) Top Decile: Net IRR: VC: 41.14%, PE: 32.23% - Average delta of 8.9%, VC outperformed PE on a net IRR basis 62% of the time of (16/26) TVPI: VC: 3.06x PE: 2.51x - Delta of 0.5x; VC outperformed PE 65% of the time (17/26) DPI (1996-2018 to adjust for time to liquidity): VC: 2.11x, PE: 2.16x PE provided better DPI 60% of the time (13/22): Note that in yeras post 2013, both VC and PE still have significant unrealized residual portfolio value (particularly VC).  Top Quartile: Net IRR: VC: 25%, PE 23%, - Avg delta of 2%, VC outperformed PE about half of the time (14/26) TVPI: VC: 2.38x PE: 2.07x, delta of .3x, VC outperformed PE 73% of the time (19/26) DPI (96-2018): VC: 1.66x PE: 1.76x, PE provided better DPI 60% of the time (13/22). Bottom Quartile: Net IRR: VC: -4.9%, PE 8% - Average delta of 13%, PE outperformed every year (26/26) TVPI: VC: 0.77x, PE 1.05x - PE outperforms 73% of the time DPI: VC: .31x, PE .67x: PE outperforms 91% of the time 21/23 years

Michael Louie

CPA, Partner at D+H Group LLP, Multi-family Office, Family Enterprise Advisor, Investor in the Underrepresented

1y

conclusion = as long as you pick fund managers appropriately, then investing VC makes sense over PE? and now that PE returns are being compressed in this higher interest rate environment, how would this analysis change going forward?

Greg Heywood

Private Investor/Founding Partner, Jackson Square Partners/Experienced Equity Portfolio Manager in US, Developed and Emerging Markets

1y

Thanks for this. What did median and average of VC and PE do, vs S&P500 and Nasdaq?

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Spencer Whitworth

Financial Restructuring - Houlihan Lokey

1y

What about medians?

Ertan Can

Founder @ Multiple Capital ⎜ Investor in micro VC funds

1y

Pitchbook data is very limited when it comes to showing real outlier returns in venture. They don't cover over 90% of all small VC funds, which are the best performing funds in Venture. Most of the funds we have invested in in the last decade are not covered by pitchbook, including us ;)

Aaron Tamaddon

Backing brilliant B2B operators

1y

Top Quartile VC vs. PE was the most interesting. PE’s downside scenarios are more attractive.

Roxanna Zarnegar

Transforming the Art World Through Innovation and Collaboration: A Leader in Fine Art, Events, and Technology

1y

The problem with this analysis is that VC's need to provide more justification on why they are needed. The current rapid decline in shareholder value lends itself to disruption and therefore VC's need to defend why they aren't replaceable with a simple algorithm. Or AI.

Jose Gaytan de Ayala

Venture & Growth Investor at Kinnevik | MIT MBA

1y

Super interesting thanks! Do you have the data of the analysis? Would love to check it out

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Reyhaneh Blackman

Co-Founder @ Product Pair

1y

Can you please share on average (not top/bottom quartile but the 50% mark)? Very interesting analysis 🧐🙏🏼

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Davis Yang

Driving High-Value Deals, Investments, and Corporate Strategy in Biotech

1y

Thanks for a great analysis. On the surface, it would look like VC did not outperform PE in DPI (imo the most important metric), and that is troubling, because VC takes on a higher risk profile. However, as you mentioned, VC has the unique characteristic of persistence of returns - so if an asset manager is able to get into a top quartile VC, it's likely that will be their ticket to enjoying top quartile performance in vintage after vintage, whereas if they got into a PE fund which had top quartile performance, it's quite possible the new fund they got into may not replicate the top quartile performance of the previous one.

M Ozgur Altan

Founder at Private Equity, Venture Capital and Real Estate Investments (PEVCRE), Angel Investor and Investment Advisor

1y

This is very good analysis. Even though this is only a part of the whole fund universe, as also suggested in the message, I would expect the rest to be in line with these findings. The crucial part is; VC has better IRR however PE is better on cash on cash returns, and if you are not able to get the same IRR level return with your uncalled commitments waiting in cash, your real annual returns are not at those IRR levels. Cash on cash is a better measure of comparative performance for most people when benchmarking. Given that downside protection is better with PE, and that even top decile VC can’t outperform top decile PE on DPI, for most investors PE is a much safer bet for outperformance of their alternatives.

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