One active European fund has an IRR of more than 100%

Venture capital might have been born in the US — but Europeans aren’t too bad at it nowadays.

European VC returns are better than North American VC returns over 10 and 15 year horizons, finds a new report from industry body Invest Europe, based on data from investment firm Cambridge Associates.

European VC yielded 20.77% net IRR (internal rate of return) over 10 years, compared to North American VC’s 18.18%. Over a 15 year period too, European VC has better returns: 16.57% IRR to North American VC’s 16.09% IRR.

However, over a 20-year period, North American VC’s IRR edges past European VC’s: 13.03% compared to 12.87% for Europe. North American funds are also faster to pay back their investors — with LPs getting their money back in 4.5 years, on average, compared to 6.7 years in Europe.

IRR is an (imperfect) measure used in private equity to compare fund performance. It shows the expected annualised return a fund should generate; the higher the IRR, the better the performance. Most early-stage VC funds will be aiming to get an IRR above 30%.

Good years

Invest Europe and Cambridge Associates’ data also shows that, just like wine, VC vintages have good years and less good years.

2011 was one of the best of recent times; the TVPI (total value to paid-in capital) of still-active European VC funds formed in 2011 is 7x, while IRR is 37%.

2016 was also a good year; the TVPI of still-active European funds formed that year is 3.7x, while IRR is 33%.

The boom years coming out of the pandemic — 2021 and 2022 — look set to be terrible vintages, with TVPI of 1x and IRR of 1% (although it’s still early days for those funds).

TVPI is another performance measure used to compare funds. It shows the value of a fund — calculated by taking the sum of all distributions made to investors to date, plus the unrealised value of investments still held by the fund — relative to the amount of capital paid into it. Funds with a TVPI of less than 1x are valued at less than the money put into them.

New guard vs old 

Contrary to oft-shared PitchBook data from 2021 showing that first-time fund managers deliver stronger returns than more established funds, Cambridge Associates’ data shows that ‘established’ funds (those on their fifth generation, or later) perform best, while ‘new’ funds (first or second-time funds) perform worst.

First-time funds (looking across the full European data set, from 1986 onwards) have an average TVPI of 1.65x and IRR of 9.77%, compared to established funds’ TVPI of 2.71x and IRR of 19.75%.

The winners

Europe also has one huge outlier. One European fund — which is still active — has an IRR of more than 100%.

The data

Cambridge Associates used a sample of 223 European VC funds raised between 1986 and 2023, with a total capitalisation of €42.3bn; 161 of those funds remain active, and 62 have been liquidated.

Over half (123) of the funds are first or second-time funds; 52 are third or fourth-time funds; 48 are ‘established’ ie. a firm’s fifth fund or more.

Its North American data set is much bigger, encompassing 2,500 funds with a capitalisation of €561.6bn.