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Introduction:
ABC Venture is raising a third venture fund and is seeking LP commitments.
This memorandum will analyze the track record and summarize key performance
components of their prior two funds in an effort to determine if ABC Venture III
represents a suitable investment opportunity.
Fund Analysi
On a fund level, ABC Venture I produced a TVPI of 1.48x, DPI of .55x, and a gross IRR
of 6.2%. While this seems like an underperforming fund given recent returns and trends
in the venture capital market, the IRR, DPI, and TVPI are fairly average for this vintage
year. According to a recent Cambridge Associates benchmark report published in June
2014, the pooled IRR for funds with a 2005 vintage is 7.29%, the TVPI is 1.40x, and DPI
is .50x. Top quartile performance for funds with a 2005 vintage show a 10.48% IRR and
lower quartile is -.79%. The S&P 500 and Russell 2000, both produced IRR returns of
around 9% for the same investment period.
However, taking a closer look at the June 2014 Cambridge report reveals that for the
information technology industry, IRR returns for that group of companies with a 2005
vintage is actually 24.96%. ABC Venture I invested heavily in information technology
and a significant number of the companies that were realized and remain unrealized are
IT investments.
ABC Venture II
ABC Venture II is a 2008 vintage fund that, having invested $112,972 across 26
companies, has had only two exits. The two exits, costing the fund $12,000, generated a
realized return of $25,752, a TVPI/DPI of 2.15x and an IRR of 38.6%. However, these
exits only represented 10% of the total cost and 17% of the total value in Fund II.
As of December 31, 2014, only seven of the 24 unrealized companies, representing 38%
of the unrealized fund value, have positive TVPI ratios and IRR returns. More than 62%
of the portfolio companies in ABC Venture II remain unrealized with TVPI ratios at or
below 1.0x. In aggregate, unrealized companies produced an IRR of 3.9% and a TVPI of
1.23x. With 24 of the companies still unrealized, it represents a substantial portion of the
funds value and cost, as seen below.
ABC Venture II, at the fund level, has produced a DPI of .23x, TVPI of 1.33x and a 5.9%
IRR. Comparatively speaking, ABC Ventures second fund has preformed very poorly to
other funds with the same vintage. According to the June 2014 Cambridge Associates
benchmark report, funds with vintages of 2008 generated pooled IRR of 17.05% and
averaged DPI and TVPI ratios of .32x and 1.59x, respectively.
Third, it is curious as to why ABC Venture II, with total investments of $112,972, is 30%
smaller than ABC Venture I, which has a total investment size of $166,541. Usually,
when a firm raises its second fund and has a strong LP backing, the GPs are able to raise
a similar sized fund (if not a larger one). It is concerning that ABC Venture has not been
able to do this for their second fund and brings into question their LP support,
performance, and cohesion as a team. Without any additional information, there could be
many reasons why their second fund is smaller, but given the performance to date, it
implies there might be a performance / management issue and that the current LPs lack
confidence in the team.
Finally, the GPs only sent fund performance data. Other information that would be
helpful to analyze this investment opportunity would include:
Questions include:
What are the prospects regarding exits in Fund I & II for unrealized companies?
Why do so many unrealized companies in Fund II have a TVPI of 1x even though
their initial investment date was five to seven years ago? Are they really at a 1x or
should they be written down / off?
A 15% to 20% ownership in the portfolio companies is generally large enough
ownership level to request a seat on the board. Are you on the board on any of the
companies in Fund I or II?
What kind of support, other than monetary, do you provide your portfolio
companies?
How much have the fund managers, themselves, invested in the prior two funds?
Where are the majority of companies in Fund I& II located? Will this change in
Fund III?
What is the target size of Fund III? Have many LPs already committed?
Will Fund III invest in similar types of industries, rounds, etc.?
What mistakes have the managers learned from Fund I & II that will change the
performance in Fund III?
Would Cintrifuse be a strategic partner and LP? Or would we be a smaller LP and
have little influence?
Is ABC Venture a fund that we think would invest in Ohio River Valley
companies and provide meaningful value to them?