SFERS Venture Portfolio Shows Decline

SFERS Venture Portfolio Shows Varied Performance

In a recently published report by SEERS, the performance of their venture portfolio has revealed a notable decline, registering a -0.9% internal rate of return (IRR) in the third quarter of the previous year. This figure stands in stark contrast to the 48.8% IRR reported in 2021 and a -19.9% return in 2022. The report covers funds at different stages, including those still in the process of deploying capital. While specific fund performances were not disclosed, the overall outlook indicates a downward trend, with the most recent fund commitments exhibiting underperformance when compared to a standard year like 2018, wherein SFERS boasted a 22.3% IRR. Nevertheless, the -0.9% IRR in 2023 marks an improvement from the -19.9% in 2022, hinting at a potential avenue for recovery. Despite the challenging landscape, SFERS continues to maintain activity in the venture sphere, having pledged to 15 venture funds in 2023 and an additional two so far in the current year.

Key Takeaways

• SFERS's venture portfolio experienced a significant dip with a -0.9% IRR in 2023, down from 48.8% in 2021 and -19.9% in 2022.
• The negative IRR signifies an overall downturn in fund performance, with new commitments proving to be underwhelming.
• Despite the adverse IRR, the 2023 performance improvement compared to 2022 suggests a potential turnaround.
• Even amidst operational challenges, SFERS remains dedicated to venture investments, allocating $75 million to IVP XVIII and $40 million to Volition Capital Fund V in 2024.
• SFERS's enduring commitment to the venture sector, with a $3.6 billion portfolio, underscores its belief in the industry's potential recovery from the downturn.

Analysis

The downturn in SFERS's venture portfolio performance, evident in the -0.9% IRR in 2023, can be attributed to market volatility and an economic slump. This performance shortfall directly impacts Limited Partners (LPs) who have invested in these funds, potentially leading to financial strain. However, SFERS's ongoing involvement in venture capital, as evidenced by their recent support of IVP XVIII and Volition Capital Fund V, signals a steadfast confidence in the industry's resurgence. This optimism, coupled with the improving IRR trend from 2022, indicates the possibility of a market revival. While immediate financial challenges may confront LPs, the long-term outlook remains positive, as venture capital continues to present itself as a viable investment avenue.

Did You Know?

• Internal Rate of Return (IRR): IRR holds significance as a metric utilized in capital budgeting to gauge the potential profitability of investments. It represents the discount rate that renders the net present value (NPV) of all cash flows, both positive and negative, from a particular project or investment, equal to zero. In this context, a negative IRR indicates that the venture portfolio's investments have yielded lower returns than the cost of capital, hinting at an overall underperformance.
• Venture Capital Funds: These funds function as pooled investment vehicles managing capital from limited partners (LPs) like SFERS to invest in startups and private companies exhibiting high growth potential. The funds traverse various stages, from seed funding to later-stage growth capital. The report indicates that some of SFERS's recent fund commitments have underperformed, contributing to an overall downturn in IRR.
• SFERS (San Francisco Employees' Retirement System): SFERS serves as a substantial public employee pension fund in San Francisco, overseeing a $30 billion portfolio. In its capacity as a venture LP, SFERS commits substantial capital to venture funds, underscoring its confidence in the industry's prolonged potential. Despite experiencing negative IRR in recent years, their continued investment in 2024 signals an impending recovery on the horizon.