High returns for start-up investors

Investors who backed start-up and developing companies received an average annual return of 15.7 per cent between 1994 and 2005, a survey to be published this week will show.

The Irish Venture Capital Association (IVCA), which commissioned the survey, said it bolstered the argument for greater investment in venture capital by pension funds.

The IVCA wants pension funds to invest 1 per cent of the €78 billion they have under management in start-ups and developing businesses.

Venture capital is used largely to finance new and emerging businesses in areas such as technology and life sciences. According to the latest figures, the total invested in the area in the Republic fell to €211 million in 2005 from €242 million in 2004.

This is partly because the firms involved are due to begin fundraising for the next round of investments. As a general rule, they operate on a five-year cycle of raising and investing money.

The association is due to publish a report which shows that returns on venture capital investments ran at 15.7 per cent a year between 1994 and 2005, even allowing for the collapse of the technology bubble at the beginning of the decade.

The report, by Frank O'Brien and Brian O'Loughlin, shows that in the 17 years to 2005, Irish pension funds delivered a real average annual return of 7.3 per cent. The document also highlights the volatility that pension fund managers have had to deal with. Since 1989, returns have varied between a gain of 42.9 per cent in 1993 and a loss of 18.9 per cent in 2002.

Niall Carroll, principal of ACT Venture Capital and chairman of the IVCA, said returns on Irish venture capital investments compared favourably with overall pension fund performance, and were insulated against much of the volatility associated with other investments. "Venture capital is perceived to be riskier but the returns are higher," he said. "You are getting exposure to equities, but they are emerging equities in high growth areas."

However, his association said Irish pension funds were investing far less proportionately in venture capital than in the US and UK. "In the US, they are putting 15 per cent into private equity. In the UK, 56 per cent of funds are putting 2.3 per cent into private equity; that includes buyouts and venture capital," he said.

Irish funds put less than half of 1 per cent into these investments, while total support for venture capital in the Republic comes to 0.042 per cent of gross domestic produce, one-fifth of the share that venture capital receives in Britain.