Ambition and Caution: A Comparison of Buyout and Venture Returns from 1998-2021
Given the wild drawdown in 2022, we analyzed where seasick institutional investors could bolster the stability of their portfolios. We used a wide lens to determine the performance and stability of investments in the two most popular styles in North America—buyout and venture capital. We compared their total value to paid-in capital (TVPIs) between 1998 and 2021 to see the returns each investment style might offer to investors moving forward.
Buyout TVPI has a surprisingly stable history. Through two separate drawdowns from 1999-2008, the average buyout fund held above a 1.5x return on its investment. Funds quickly rebounded from these lows, gaining around 0.25x on average from the lowest point. This consistency in performance extends to the 2010s when buyouts once again gained momentum and peaked around a 2x return. Lower returns in the final years of the sample set above are expected due to the drawdown of the 2020s and the fact that these buyout funds have yet to yield fully on their investment. One reason for this consistency is the buyout’s relatively safe investment focus: investing in established firms that are not necessarily cyclical.
On the other hand, venture capital has (unsurprisingly) a highly volatile history. The Dot Com bubble had a deleterious effect on venture fund valuations, where they dipped below a 1x return, resulting in the average investment losing money. While returns would quickly climb, they remained suppressed going into the Great Financial Crisis (2007-2008). However, coming out of it, we see the power of venture capital investing as returns catapulted to several multiples beyond the initial investment—and far beyond the average buyout return. Yet this launch was not without turbulence, as the yields see much higher volatility of return due to the riskiness of early–stage investing. Much like buyout TVPI, the more recent years reflect incomplete investing horizons for venture capital.
At face value, these are hardly novel ideas. Experienced investors know that venture capital is risky, and buyout investing is relatively stable by comparison. However, visualizing these systems of consistency and opportunity offers perspective on where investors may look next. As we are once again working through a tumultuous economic period, we see investors presented with a familiar choice: ambition or caution.
Will investors choose ambition over caution? Venture capital performed impressively after the Great Financial Crisis, and there is room for disruption following the recent tech drawdowns. But, given the volatility of venture investing, some investors may wish to refrain from stacking additional risk on their plate. They may also choose caution. Buyout has shown incredible consistency in and out of recession, and will on average yield a positive—but not highest—return.
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