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Jul 28

VC firms escape registration

Posted by mcole in venture capitalTaxSecurities and Exchange CommissionRisk, returns, private equity, financial reformcompliance


Call it a victory for the venture capital industry.

Unlike other alternative investment firms such as private equity funds and hedge funds, under the new financial regulation bill venture capital funds are not required to register with the Securities and Exchange Commission if they have at least $150 million under management.

The industry's main lobby group, the National Venture Capital Association, successfully argued that venture capital firms are too small to be systematically important and shouldn't be subject to registration and compliance requirements.

But the venture capital industry still has some hurdles to sort through. Another bill in Congress is trying to tax venture capital firms at a higher rate than they have historically been taxed by considering their income as ordinary income as opposed to capital gains.

Meanwhile, VC firms have not fared well since the global financial crisis two years ago. While the funds have recently gone up for the short term thanks to an improving exit market, they are still on the decline in the long run.

Short-term performance improved in the first quarter of 2010, reflecting the opening of the initial public offering window and a healthy level of merger and acquisition activity. For example, for the one year period ending March 31, 2010, VC funds were up 6.5 percent, on average, compared with a negative 17.3 percent for the one year period ending March 31, 2009, according to the Cambridge Associates US Venture Capital index, the performance benchmark of the NVCA.

However, the improvement was not enough to bolster the 10-year returns, which continue to deteriorate as the calculation for this time horizon no longer includes the high performing 1999 calendar year, Cambridge noted in a report published Wednesday.

For example, for the 10-years ended March 31, VC funds returns were at a negative 3.7 percent, way down from a positive 25.8 percent for the 10-year ended March 31, 2009. In other words, instead of the dot-com bubble skewing overall performance, only the bust part of the cycle is being reflected in the 10-year number.

"We continue to see a decline in the 10-year return number but believe it will bottom-out in the mid-negative single digits over the next two quarters," predicted Peter Mooradian, managing director at Cambridge Associates. "Sustained improvement in the exit market should result in the figure returning to breakeven or modestly positive territory in the second half of 2011."

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