Suppose a venture fund wishes to base its required return (used in discounting future terminal values) on its historical experience and suggests merely averaging the rates on the last three concluded deals. These deals realized total returns of –67% at the end of 2 years, 50% at the end of 5 years and 70% at the end of three years, respectively.
Assuming no intermediate flows before the terminal payoff, verify that the associated annualized rates are –42.55%, 8.45% and 19.35%.
What is the equally weighted average annualized return?
Does it make sense to use this as a single discount rate to apply across scenarios involving different durations?