September 22, 2021

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Meaning of Vintage Year for VC and Private Equity and Key Explanations

Meaning of Vintage Year for VC and Private Equity and Key Explanations
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Small companies need finance to grow. However, banks are not willing to give these firms the required fund. One reason is the lack of collateral by these firms. However, these companies can seek funds from venture capital firms. Such funds are referred to as private equity or VC funds. One challenge of this funding is the vintage year. What is it? Let’s dive in!

Definition of Vintage Year

1. The vintage year is the primary year VC or private equity fund is committed to the Venture capital or small company to finance its project or to serve as working capital.
2. It can also be defined as the milestone year that venture capital funds are made available to startup companies.

Key Explanations

Primary or milestone year. That is the year the fund is committed. There might be confusion in determining the vintage year. Is it when the VC fund is made available to the general partners? Or when the fund is invested in startups? In most cases, the latter is used.

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VC fund. Also called a private equity fund. It is the total capital sourced by the general partners of a venture capital firm from the limited partners. It can also be sourced from Angel investors. The fund can be given to a single private equity company or a combination of it. Normally the finance is expected to last for a minimum of 10 years after which an exit by the venture capital firm is imminent.

Committed Fund/period. The committed fund is the amount the limited partners had agreed to contribute to the fund. This sum of capital can be paid within a particular period referred to as the committed period. During the period, several calls can be made by the limited partners.

Startups. These are small companies that need the finance. In most cases, the kind of finance they seek is not provided by commercial banks. For example, an entrepreneur seeking finance to sponsor the development of an idea. Traditional banks cannot provide such capital. Because repayment will be difficult. Even when possible will require a longer repayment plan. However, venture capital firms dear any entrepreneur willing to take a risk.

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Why consider Vintage Year?

Investors or limited partners and other stakeholders of private equity are interested in a vintage year for some reason. If a vintage year is known, it can be used for comparison purposes. Also, it can be used to compare funds provided by various venture capital firms with the same vintage year. More so, it is used to know what business cycle a fund was provided for. Private equity finance provided to a startup during its early years may be overvalued but that provided during the decline period may be undervalued.

The vintage year is used to know the economic period the fund was raised. Fund provided during the period of recession cannot be compared with the fund provided during the economic boom period nor the covid-19 period.

Conclusion

The use of Vintage year is taken from the wine grape industry. There, it is when grapes are harvested. For venture capital or private equity, it is the period when the fund is committed to a startup. The vintage year is necessary for comparison with other funds in the same year.

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