Vintage year in the
private equity
In the field of finance, the term private equity (PE) refers to investment funds, usually limited partnerships (LP), which buy and restructure financially weak companies that produce goods and provide services. A private-equity fund is both a t ...
and
venture capital
Venture capital (often abbreviated as VC) is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential or which h ...
industries refers to the year in which a fund began making investments or, more specifically, the date in which capital was deployed to a particular company or project. This metric is useful for
benchmarking
Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost.
Benchmarking is used to measure performanc ...
, identifying trends, estimating the holding period, and controlling returns for the effect of
business cycles
Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examini ...
.
Origin
Most likely, the term ''vintage year'' is borrowed from the
winemaking
Winemaking or vinification is the production of wine, starting with the selection of the fruit, its fermentation into alcohol, and the bottling of the finished liquid. The history of wine-making stretches over millennia. The science of wine and ...
industry, where it is also used to divide wines in comparable classes.
Overview
The year of investing is an important and widely used metric to compare performance of the investments financed in the year in question against that of the investments financed in other years or against that of the general market (S&P 500). As the external market conditions change following the overall
business cycle
Business cycles are intervals of expansion followed by recession in economic activity. These changes have implications for the welfare of the broad population as well as for private institutions. Typically business cycles are measured by examin ...
,
so does performance of investments. Therefore, returns of 50% on investments done in good years are not directly comparable to returns of 10% done in crisis years. That is why a vintage year is taken into account.
Returns and IRRs – an explanation
/ref> The returns are comparable if investments share approximately the same timing.
References
External links
2012 could be a good vintage year for private equity investments
Private Equity: The Propaganda versus the Facts
Measuring returns in Private Equity
Equity Release Calculator
{{Private equity and venture capital
Private equity
Venture capital