The VC's lot is not a happy one in 2003

As the economic slump continues, investors in venture capital funds are seeing lackluster returns, according to a joint report by a venture capital research firm and venture capital association.

An anaemic market for initial public offerings and a slow pace for mergers and acquisitions have tempered distributions to limited partners in venture capital funds, according to a joint report Tuesday by Thomson Venture Economics and the National Venture Capital Association.

Jesse Reyes, vice president of Thomson Venture Economics, said in a statement: "What is troubling is that the longer 20-year performance for the entire private equity industry is now less than 15 per cent, which albeit is higher by a significant amount than public equities, but barely meets the 15 to 20 per cent expected returns that limited partners had when making these investments."

Venture funds, which tend to have a life of 10 to 12 years, have seen the return on their limited partners' investments fallen of late. A fund started in 1996, for example, would have returned roughly $1.17 on every dollar originally invested after three years. But funds started in 1999 would have returned only 67 cents on every original dollar invested after three years, according to the report.

Mark Heesen, National Venture Capital Association president, said in a statement: "It will likely take several years for short-term private equity performance to return back to normal levels, as it will take sometime for company valuations to rise and the IPO and M&A markets to recover."

In the third quarter, meanwhile, venture capital returns fell 22.3 per cent year over year for the period ending Sept. 30. That was a slight improvement over a 28 per cent drop in the second quarter compared with the previous year.

Dawn Kawamoto writes for News.com