Venture capital funds attract new investors Rising prices for stocks in small companies, brisk market for new issues cited.

March 10, 1992|By Allan Myerson | Allan Myerson,New York Times News Service

NEW YORK -- Venture capital funds, bloated in the mid-1980s but famished for the last few years, are again enticing investors.

Soaring prices for small-company stocks and a frenzied market for initial public offerings have nourished the recent returns of older funds, helping venture-fund managers raise capital for new ones. Pension funds and university endowments are pouring more of their money into the portfolios of young companies that venture funds assemble.

Fund managers relish the prospect that President Bush's proposed cut in the capital-gains tax would bring wealthy individual investors back.

The University of Notre Dame has raised its venture investments from about $5 million in mid-1990 to $9 million now, with commitments to add $30 million over the next few years. Scott C. Malpass, the chief investment officer for the university's endowment, has been surprised by how readily venture funds have raised capital.

"A year ago it would have been hard to raise $40 or $50 million," he said. "Last year, some funds raised $250 million."

But the return to venture funds is no stampede. Some institutions, disappointed with past returns, are standing pat, and a few are selling their positions for less than their market values. The wildly varying fortunes of biotechnology stocks have caused some venture investors to hesitate, and a stock market retreat could prompt them to pull back.

Investors swear that they have learned from their mistakes during the late 1980s, when they flushed money in so furiously that the many competing venture funds had a string of losing years. But now that many investors have turned upbeat, some, including Mr. Malpass, say that the best time to make new commitments has passed.

"I am less excited than I was a year and a half ago," he said. "We're still making commitments, but we'll be much more selective."

Venture funds invest in new companies -- mostly in technology -- with a view toward selling out several years later. The funds remain crucial to giving companies long on ideas but short on history the financing to develop and market their products.

Many of these enterprises fail, but many have blossomed into some of the nation's most prominent corporations, including Digital Equipment, Compaq Computer, Intel, Genentech, Lotus Development Apple Computer and Federal Express.

Some fund managers see the rebound of venture capital funds as a boon for the international competitiveness of American products.

"We're creating important new technologies, new jobs, new wealth," said David P. Best, a general partner in Oak Investment Partners, a Menlo Park, Calif., venture capital firm.

Venture funds are not for the conservative, the cash-short or the impatient. Minimum investments are often $1 million, although some funds allow individuals to put down as little as $50,000. A fund typically has a 10-year life, taking several years to find suitable investments, then years more trying to sell the companies or take them public.

Returns can range from many times the original investment to total wipeouts.

As venture funds multiplied wildly through the mid-1980s, they found too few sound investments. Entrepreneurs often dictated unfavorable terms.

After years of annual returns averaging more than 20 percent, venture capital lost an average of 3.8 percent annually from 1986 through 1990. The best estimates for 1991 are that returns climbed back up to 10 percent.

Barton M. Biggs, research director at Morgan Stanley & Co., guessed that venture capital would produce a compound annual return of 25 percent over the next five years -- "which should look terrific compared with anything else."

Venture capital has rebounded so recently that evidence of a recovery has shown up so far only in analysts' insights and the list of firms that have raised money, not in the available statistics.

Venture Economics, a Newark-based unit of Securities Data Co., says that commitments to venture funds rose from $661 million in 1980 to $4.2 billion in 1987, but fell back to $1.3 billion last year.

This year, said Robert E. Mast, vice president of Venture Economics, the funds will attract about $2 billion. He attributed the renewed rush to the success of last year's initial public offerings, especially for biotech companies.

Last year, 116 venture-backed companies went public, he said -- more than in the three previous years combined, and the most since 1983, he said. Only two venture-backed biotechnology companies went public in 1990; 25 did last year.

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