VC returns hit the lights out in 2020 and 2021 but the following year saw a slump as central banks hiked interest rates. Fundraising fell sharply in 2023. Returns have started to rise, figures show.

Returns from VCs started to improve in 2024, although they will need to accelerate to catch up with the giddy levels of 2021 before the market was hammered the following year.

In the first quarter, VC internal rates of return (IRRs) were 1.5 per cent. That compares with a 2.1 per cent drop in the 2023 calendar year, and a slump of 20.6 per cent in 2022, coming after a 49.8 per cent return in 2021 and 58.2 per cent for 2020, according to MSCI.

As far as private equity buyout funds are concerned, they eked out a 1.2 per cent return in the first quarter, contrasting with 3.8 per cent in 2023 and a slide into the red of 11.8 per cent in 2022. 

Among private debt funds – all types, including senior and mezzanine debt – returns were 2 per cent in the first quarter, and 9.8 per cent for 2023 and 3.7 per cent for 2022.

Sectors such as private equity, credit and venture capital have prospered over the past 15 years on the back of ultra-low interest rates after the 2008 financial crash, and a structural shift toward privately held companies and away from listed equities. This shift is a steady theme of commentary among the wealth management and family offices sectors.

The VC industry has also seen considerable fluctuations in its fundraising. According to Statista, in 2023, US venture funds, for example, raised $66.9 billion across 474 funds. This was a steep decline from the record number of $172.8 billion in 2022.  

The amount of money distributed by all these fund types, however, is under pressure, MSCI said. 

Distributions – or the lack of them – have been a talking point since they started to slow in 2022. Private equity distributions during Q1 2024 were just 8.7 per cent of valuation, the organization said.

“While there is a seasonality to cash flows (with activity during the first quarter generally lower than the rest of the year), this distribution rate is a notable decline from the 11.6 per cent level in Q4 2023 and back near the 8.2 per cent lows from earlier in 2023. For 2015 through 2019, the distribution rate averaged 23.5 per cent,” MSCI said.

“Looking ahead, the private-capital landscape remains uncertain as asset owners navigate through challenges such as a slowdown in private-equity distributions and the stalling of distributions from some venture capital and real estate fund vintages. Still, on the plus side, performance has generally been positive for most major private-asset classes since the lows of 2022,” it concluded.

MSCI is flexing its muscles in the alternatives/private markets space. As reported here, it launched MSCI Private Capital Indexes, which capture returns and other data from global markets, a rising area of interest for wealth managers and other investors. MSCI Private Capital Indexes, which capture returns and other data from global markets, are a rising area of interest for wealth managers and other investors.