According to an eFront study, 29% of funds exceed the 8% annual return mark which allows them to return a capital gain to managers. This rate is higher in the United States, while remaining low. The publisher calls for this threshold to be revised.
The explosion of private equity against the stock market does not benefit all European funds. To believe the editor eFront who compared, for “Les Echos”, 288 investment companies of the capital-risk in the European Union and 182 in the United States, few managers managed to pass the 8% mark annual return, this famous rate (“the hurdle rate”) beyond which they can expect to receive a share of the capital gain linked to the resale of the companies in which they have invested.
The United States is also suffering
Only 29% of Union investors have in fact crossed this threshold for all the funds they managed between 1992 and 2012 (the more recent funds are still open). Even more surprisingly, this is also the case in the United States, the world’s leading “venture” market. Thus, 62% of funds analyzed across the Atlantic do not exceed 8% return. “A handful of management teams drive the market in the United States. Below the first decile, the returns are actually rather mediocre ”, comments Jean Bourcereau, president of Ventech, active for 20 years in the market, and whose funds, except that of 2000, all passed the bar of the “hurdle rate”.
Performance affected by long durations
In the end, thus indicates eFront – which does not cite any name – only 36 “venture” funds in Europe stand out with more than 15% annual rate of return. At the other extreme, no less than 118 have a negative rate of return in the Union. By way of comparison, European funds, which engage in large acquisitions financed by debt (LBO), are 64% (265) to cross the “hurdle rate”. They even do a little better than their American competitors (62%, or 171) …
“Unlike the LBO, in the ‘venture’, many teams close after only one generation of funds”, explains Jean Bourcereau. In France, venture capital funds supported by tax deductions (FCPI), little incentive to tight management of investments, also contributed to deteriorate the perception as the overall performance of the sector, according to professionals. eFront also highlights the much longer holding period of “venture” funds compared to LBOs, which mechanically deteriorates performance in relation to the number of years invested. And only a few rare teams crossed the first Internet bubble.
Abolir le « hurdle rate » ?
The picture is not completely black. “Since 2005, performance has improved for ‘venture’ funds”, indicates eFront, and both the success and the longevity of the French Partech, Idinvest, Ventech and Iris Capital demonstrate it. According to France Invest, for example, the performance of the French “venture” has gone from 1.9% net over all generations of funds since its inception to an average rate of return over the last five years alone of 5.6%.
But eFront believes that it is now time to break these codes in the “venture” and abolish the sacrosanct rule of the “hurdle rate”. “A flat rate is inadequate, says Tarek Chouman, CEO of the publisher, it leads to unfairly punishing venture capital managers, because they need more time than LBO funds to develop their assets. This has long required a review. “ And he is already putting forward a solution: that the managers agree with their investors on a variable rate calculated as a premium on the stock markets. What to give better prospects to the managers on their future capital gains.