1. Contacts:
Jeanne Metzger, NVCA, 703-524-2549 ext. 116, jmetzger@nvca.org
Jesse Reyes, Thomson Venture Economics, 973-645-9734, jesse.reyes@tfn.com
PRIVATE EQUITY RETURNS CONTINUE TO REFLECT FALLING VALUATIONS
AND LIMITED EXIT OPPORTUNITIES
April 21, 2003--Newark, NJ--Annual private equity returns continued to be negative for the eighth straight
quarter, according to the year-end 2002 Private Equity Performance Index results released today by
Thomson Venture Economics and the National Venture Capital Association. Venture capital funds have
been impacted most severely with back to back 20 percent or more losses for two years in a row.
Valuations of high technology companies continue to fall and exit opportunities remain scarce, negatively
impacting short-term private equity performance. However, this performance must be taken in context that
the overall equity markets have all been adversely impacted by the 1995-2000 technology boom. As a
result, private equity performance has outpaced NASDAQ, which is the venture industry’s most relevant
public market benchmark since most public exits of VC investments are traded on NASDAQ.
Figure 1. Venture Economics' US Private Equity Performance Index (PEPI)
Investment Horizon Performance as of 12/31/2002
Fund Type 1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
Early/Seed VC -27.6 -4.7 51.4 34.9 20.4
Balanced VC -22.8 -8.0 20.9 20.9 14.3
Later Stage VC -15.7 -8.5 10.6 21.6 15.3
All Venture -23.3 -6.8 28.3 26.3 16.6
All Buyouts -5.5 -5.6 1.1 8.7 12.3
Mezzanine -1.7 1.2 6.3 9.8 10.3
All Private Equity -11.0 -5.4 7.8 14.8 14.3
Source: Thomson Venture Economics/National Venture Capital Association
*The' Private Equity Performance Index is based on the latest quarterly statistics from Thomson Venture Economics’ Private Equity
Performance Database analyzing the cashflows and returns for over 1600 US venture capital and private equity partnerships with a
capitalization of $534 billion. Sources are financial documents and schedules from Limited Partners investors and General Partners.
All returns are calculated by Thomson Venture Economics from the underlying financial cashflows. Returns are net to investors after
management fees and carried interest.
Figure 2. Public Equity Returns as of 12/31/2002
1 Yr 3 Yr 5 Yr 10 Yr 20 Yr
NASDAQ -31.6% -31.0% -3.2% 7.0% 7.1%
Source: Thomson Venture Economics/National Venture Capital Association
Private equity returns are derived from distributions back to investors and interim valuations. With
valuations continuing to fall since 1999 and distributions back to investors scarce due to the lifeless IPO
and M&A markets, short-term returns have been negatively impacted. In an effort to reverse the current
negative trend, venture capitalists have been working to restructure their portfolios. This has entailed
searching for new companies that meet the core competencies of their firms' strategies, restructuring
existing companies through recapitalizations and turnarounds, and in the worse case scenario closing
failing companies. Fortunately, private equity funds have a lifespan of, on average 10-12 years, which

2. allows the fund managers to weather downturns and invest throughout business cycles, which has
historically resulted in strong returns over the long-term.
According to Jesse Reyes, Vice President at Thomson Venture Economics, “The two and a half year
downturn in venture and private equity returns are not surprising, given what has been going on in the
public markets. The tide seems to have lowered all ships. The inevitable winnowing process that this will
create will ultimately leave a much leaner but probably more robust investment market for private equity
investing. The fact that 20 year returns for early and seed stage funds are still above 20 percent
demonstrates that it is not an investment asset class for the short-term mind set. While their returns are
probably the most volatile, they ultimately have demonstrated the best long term performance.”
“This should set the stage for a better investment environment in the next few years. Like investors in the
public markets, I expect that both limited partner investors and general partners have a longer investment
horizon in mind now when investing in this asset class. And just like investors in the public markets the
biggest negative impact will be for those investors who thought they could time the market but ultimately
invested at the peak of the market. .
“Venture capitalists have been diligently working with their portfolio companies while searching for new
opportunities in a wide range of sectors in an effort to position their portfolios to take advantage of the
inevitable strengthening of the markets and business climate. Although no one can predict when the
business environment will improve, all down business cycles eventually turn upwards,” commented Mark
Heesen, President of the National Venture Capital Association.
Figure 2. Fourth Quarter Company Valuations
Time Period Avg Val ($Millions) Median ($Millions)
2000-4 85.83 38.75
2001-4 51.98 30.07
2002-4 34.96 18.4
Comparison of Recent Funds to Their Predecessors After 3 Years of Activity
Venture funds have a life span on average of 10-12 years. Performance of funds, during the first three
years of investment activity, are difficult to measure and tend to be quite volatile. Investments being made
in young companies have not generated sufficient revenue to be profitable and many younger companies
are still trying to establish themselves in their respected niche markets. Overall venture capital funds should
be judged on their long term performance not the immediate short-term gains and loss. Generally venture
funds are expected to generate 15 to 20% returns over the life of the fund. As the 20 year performance of
venture capital returns dips closer to the 15% threshold, venture capital funds are still out performing the
public markets during the same time span.
However, the venture capital industry is in a state of flux with falling portfolio company valuations and
limited exit opportunities as seen when early performance of recent funds are compared to early
performance of earlier vintage year funds. For example, after 3 years of activity, 1996 vintage year funds
had returned 1.11 times the original investment to the investors. In addition, companies remaining in the
portfolios had a remaining combined valuation of 3.85 times the original investment. The consensus across
the industry is that the 1996 vintage year funds as a group exceeded all expectations.
In contrast to the 1996 vintage year funds the younger funds of today are challenged. The vintage year
1998 funds have returned 57 cents on the original investment dollar and the remaining portfolio companies
have a valuation of 94 cents on the dollar at the 3-year mark. The vintage year 1999 funds have returned 20
cents on the original investment dollar with remaining portfolio companies having a valuation of 43 cents
on the dollar at the 3-year mark. Only time will tell if these younger funds will meet the expected long-
term return threshold of 15-20%.

3. Figure 3. Results for Selected Vintage Years--Three Years from Inception
Venture Funds Measurement Realized Unrealized Total Return
(Vintage Year) Date (3 years TVPI=DPI +RVPI
from inception) (times)
Year of Return Return
Fund (DPI) (RVPI)
Formation (times) (times)
1984 12/31/1987 0.05 1.00 1.05
1990 12/31/1993 0.12 1.02 1.14
1996 12/31/1999 1.11 3.85 4.96
1998 12/31/2001 0.57 0.94 1.51
1999 12/31/2002 0.20 0.43 0.63
Source: Thomson Venture Economics/National Venture Capital Association
DPI (distributed to paid-in) = ratio of distributions paid out to investors to the original invested capital
RVPI (residual value to paid-in) = ratio of remaining portfolio holdings as valued by the venture firm to the original invested capital
TVPI (total value to paid-in) = ratio of distributed and undistributed portfolio value to the original invested capital
The National Venture Capital Association (NVCA) represents over 470 venture capital and private
equity organizations. NVCA's mission is to foster the understanding of the importance of venture capital to
the vitality of the U.S. and global economies, to stimulate the flow of equity capital to emerging growth
companies by representing the public policy interests of the venture capital and private equity communities
at all levels of government, to maintain high professional standards, facilitate networking opportunities and
to provide research data and professional development for its members. For more information visit
www.nvca.org.
Thomson Venture Economics, a Thomson Financial company, is the foremost information provider for
equity professionals worldwide. Venture Economics offers an unparalleled range of products from
directories to conferences, journals, newsletters, research reports, and the Venture Expert™ database. For
over 35 years, Venture Economics has been tracking the venture capital and buyouts industry. Since 1961,
it has been a recognized source for comprehensive analysis of investment activity and performance of the
private equity industry. Venture Economics maintains a long-standing relationship within the private equity
investment community, in-depth industry knowledge, and proprietary research techniques. Private equity
managers and institutional investors alike consider Venture Economics information to be the industry
standard. For more information about Venture Economics, please visit www.ventureeconomics.com.
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