Venture capital fund performance is falling sharply, but it may already have reached its lowest point

Venture capital has been hit hard by deteriorating macroeconomic conditions in recent years and it is not yet clear how the market downturn has affected the performance of venture capital funds. But recent data from the San Francisco Employees’ Retirement System (SFERS) gives us food for thought.

SFERS’ venture capital portfolio recorded an internal rate of return of -0.9% last year through the third quarter, according to data from the pension fund’s May 8 meeting. The data also highlighted that the venture capital portfolio recorded an IRR of 48.8% in 2021 and a return of -19.9% ​​in 2022.

It is important to remember that these figures include all venture funds in the portfolio, regardless of where they are in their life cycle, as well as funds that are still deploying capital. This means that this figure includes funds for which money is still out and not yet in, in addition to funds maturing.

So what do these numbers tell us? Although they do not tell us about the individual performance of each fund, nor about the specific performance of funds close to maturity, these numbers tell us that the overall performance of the fund is declining. These metrics also tell us that the maturing venture funds in the SFERS portfolio are not returning capital at a high enough rate to offset losses from the portfolio’s new fund commitments.

Comparing the numbers for 2022 and 2023 to a year like 2021 is an exercise in comparing anomalies. In a more “normal” year for venture capital, say 2018, SFERS recorded an IRR of 22.3%. This means that even though at least 20 funds are still in investment period, according to TechCrunch estimates, the overall performance of maturing funds has been quite strong.

SFERS’ performance also shows that the industry may have already hit bottom and is on the verge of returning to normal. Even though the pension fund still recorded a negative IRR in 2023, -0.9% is a positive signal compared to -19.9% ​​in 2022.

This data is particularly worthy of close attention, as SFERS is a fairly active venture capital firm. The organization has been investing in this asset class for much longer than many of its pension fund peers and has built a large $3.6 billion venture capital portfolio diversified across emerging and established managers, a stage and a year.

SFERS has long supported renowned managers. For example, the pension fund has invested more than $273 million in Notable Capital, $250 million in NEA funds and $69 million in Mayfield over the past decade, among others.

Recent performances have also not dissuaded pension funds from investing in this asset class. The pension fund has made 15 commitments to venture funds in 2023 and has made two commitments so far this year, including a $75 million commitment to IVP XVIII and a $40 million commitment to Volition Capital Fund v.

Although venture capital funds don’t seem poised to break out this year in terms of performance, the worst effects of the recession may already be behind us.