Venture capital distributions sink to 14-year low

Of all the problems that have besieged venture capital in recent years, arguably none is more acute than investors’ difficulties converting their paper returns into cash.

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Limited partners are disappointed with how much capital is coming back to them from their venture managers. And they’re less inclined to re-up with VCs that haven’t returned much cash. LPs are closely monitoring a metric called distributed to paid-in capital (DPI), which measures how much capital a manager returned relative to what was invested.

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But just how small are recent cash distributions compared to historical levels?

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In 2023, distributions to LPs as a percentage of mature funds’ net asset values fell to the lowest point in nearly 14 years.

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“At times like this, LPs reward track records with DPI and a lot of history,” said Laura Thompson, a partner at Sapphire Partners.

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LPs need those cash distributions to recycle them into new VC funds. Until a significant number of IPOs and liquidity starts flowing back to LPs, funds with low distributions will struggle to raise money.

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There are some signs that the IPO market will open up soon, but it’s unclear if 2024 will be a robust year for new offerings.

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“We are finally starting to see IPO pitches,” said Ron Eliasek, chair of TMT investment banking at Jefferies. “The companies that were planning to go public, I think will be [going] in the back half of this year and certainly next year.”

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If those listings happen, they should help lift VC distributions. But until then, VCs with low DPI will try to offload their stakes in the secondary market.

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Reference: https://pitchbook.com/news/articles/vc-cash-distributions-sink-14-year-low