Venture capital and private equity investments are outperforming the S&P 500, according to Steve Kaplan, an economist from the University of Chicago. Kaplan recently did a study to measure returns on the two asset classes compared to the S&P 500 over 10 years (2003–2013).

Common methods for measuring fund performance are Annualized IRR and Multiple of Invested Capital (MOIC), both of which have their drawbacks since they don’t control for market movements. So Kaplan and MIT economist Antoinette Schoar designed a method called the Kaplan Schoar Public Market Equivalent, aka KS-PME). The KS-PME is more of a market-adjusted multiple so you can understand how the funds are doing compared to S&P 500.

So how have the VC funds performed?

IRRs, Multiples, and PMEs vary substantially across vintage years.

  • PMEs performed well above 1.0 through 1998.
  • PMEs performed below 1.0 from 1999 to 2002.
  • PMEs have performed above 1.0 since 2003.
In fact, the data shows that VC funds outperformed the S&P 500 from 2003–2013 by 3–4 percent every year.

  • From 1999 to 2005, PE did much better than VC.
  • For post-2006 vintages, VC has done better.

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Why? Hasn't PE done better than VC in recent years?

The answer is that performance in VC and PE is significantly negatively related to fundraising.

While VC fundraising activity increased in 2016 but not to crazy levels like in 1999–2000, PE activity  has been close to all-time highs for the last five years, so relatively more capital has gone into PE than into VC, which might explain the large deals sizes and high valuations in the later stages.