Private Equity and Venture Capital Investments in Emerging Markets Outperformed Non-US Developed Markets in Q4 2015
Distributions Outpace Contributions Again; Media Companies Drove Strong Performance of Both Indexes; China Continues to Dominate Emerging Markets PE/VC Landscape
BOSTON (August 8, 2016) – Strong exit environments in both Europe and Asia helped private equity and venture capital funds in emerging markets and developed markets outside the US outperform public markets in those regions in 2015, according to global investment advisor Cambridge Associates.
Emerging market PE and VC returns beat non-US developed market PE and VC returns, in part because of a weakening euro, which brought down non-US developed market returns when measured in US dollars.
The Cambridge Associates LLC Global ex U.S. Developed Markets Private Equity and Venture Capital Index returned 2.0% in USD terms in Q4, bringing the return for the year to 5.7%, a slight improvement over 2014. For comparison, the MSCI EAFE returned 4.7% for the quarter but fell 0.8% for the year.
The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index increased 5.1% for the quarter and 8.5% for the year, a drop of almost 6 percentage points from its double-digit 2014 year-end result. For comparison, the MSCI Emerging Markets index rose 0.7% for the quarter but dropped over 14% for the year.
Cambridge Associates derives its non-US developed and emerging markets PE/VC indexes from data compiled from institutional quality funds raised between 1986 and 2015. There are almost 800 funds in the developed markets index, with a value of about $253 billion, and more than 560 in the emerging markets index, with a value of roughly $158 billion.
The CA global ex US developed markets index includes private equity and venture capital funds that invest primarily in Australia, Canada, Israel, Japan, New Zealand, Singapore, and developed markets in Western Europe. The CA emerging markets index includes private equity and venture capital funds that invest primarily in Africa, emerging Asia, emerging Europe, Latin America & Caribbean, and the Middle East ex Israel.
Table: Returns for the Global ex US Developed and Emerging Markets PE/VC Indexes vs. Public Counterparts
Periods Ended Dec. 31, 2015 • Percent (%)
Sources: Cambridge Associates LLC, MSCI Inc., Standard & Poor’s, and Thomson Reuters Datastream. MSCI data provided “as is” without any express or implied warranties.
Notes: Private indexes are pooled horizon internal rates of return, net of fees, expenses and carried interest. Public indexes are average annual compound returns (time-weighted returns). The PE/VC indexes’ returns are based on limited partners’ fund-level performance; the returns are net of fees, expenses, and carried interest.
(A key takeaway from the table: with the exception of the most recent quarter [Q4 2015], PE/VC in non-US developed markets outperformed its public equity counterpart [MSCI EAFE] in all time periods examined by Cambridge Associates. The emerging markets PE/VC index outperformed the comparable public benchmark [MSCI EM] in all time periods that Cambridge investigated.)
Global non-US Developed Markets Private Equity and Venture Capital Performance Insights
Distributions Reach Record Full-Year High
“Distributions to investors in non-US developed market PE and VC funds outpaced contributions for the fifth consecutive year in 2015, reaching a record high. These payouts largely benefited investors in funds launched in 2005 through 2008, 2010 and 2012, who received over 80 percent of distributions,” said Andrea Auerbach, Head of Global Investment Research at Cambridge Associates.
More specifically, in the fourth quarter of 2015, managers in the non-US developed markets index called $9 billion from investors and returned $20.3 billion, the second highest amount distributed during a quarter since the index’s inception. For the full year, contributions were down 24.4% and distributions were up 5.0% – reaching a record-breaking $69 billion.
Vintage Years 2010 and 2007 Best-Performing for Quarter and Year
The leading vintage years in the index were 2010 for the fourth quarter (4.6%) and 2007 for the year (12.4%). Strong returns from consumer companies contributed to the success of the 2010 vintage in Q4, and increased valuations in IT drove the 2007 vintage’s annual returns. The worst performing vintage was 2005, largely due to energy and healthcare companies. In Q4, this vintage returned -1.9%; it returned -0.8% for the year.
Media Sector Produced Double-Digit Returns for Quarter and Year
Media was by far the top-performing sector in the non-US developed markets index for the final quarter and for the year. Media companies returned 12.6% for the quarter and 28.5% for the year. The vintage years that contributed most to the sector’s strong return were 2004 and 2006. The six other key sectors in the index – consumer, financial services, healthcare, IT, manufacturing and software – all posted positive returns for both the quarter and the year. The energy sector, which now only accounts for 4.3% of the index, returned -18.8% to investors last year.
Portfolio Companies Based in Sweden Top Performers in 2015; Many Smaller Countries in Index Posted Negative Returns
Companies based in Sweden returned 7.9% in Q4 2015 – the highest returns of any geographic region that accounted for more than 5% of the non-US developed markets index. The worst performing region was the United States; companies based there returned 1.2% in the fourth quarter. (Some of the larger funds in the index invest in U.S.-based companies.) Five countries – Sweden, the US, Germany, France and the United Kingdom – accounted for 65% of the index’s value and each earned a positive return for the quarter and year. Some of the smaller countries in the index – like Spain, Canada and Japan – earned negative returns for the year.
Emerging Markets Private Equity and Venture Capital Performance Insights
Distributions Outpaced Contributions for Second Consecutive Year
“In Q4 2015, investors in emerging market PE and VC funds enjoyed the fourth-largest quarterly distribution in the history of the index. 2015 saw the index’s second-highest full-year distribution. Though the index returned less last year than in 2014, strong performance by media and IT companies drove solid returns for private investors in emerging markets,” said Vish Ramaswami, Managing Director at Cambridge Associates.
Funds raised in 2006, 2007 and 2010 accounted for 63% of the Q4 distribution. In 2015, capital calls ($16.1 billion) and distributions ($21.7 billion) fell below 2014’s record levels by 21% and 6%, respectively.
2011 Top-Performing Vintage in Q4 2015 Due to Consumer and IT Sectors
The consumer and IT sectors in the emerging markets PE/VC index drove the strong performance of the fourth quarter’s top-performing vintage year, 2011, which returned 9.8% in Q4. For the year, the 2011 vintage posted a 26.0% return; the two other vintages to achieve double-digit returns in 2015 were 2009 (10.1%) and 2012 (17.9%). The emerging markets PE/VC index’s largest vintage year, 2007, saw big gains in media, IT and consumer, but they were partially offset by energy-related losses and the vintage returned only 3.1% for the year.
Media By Far Strongest-Performing Sector in Emerging Markets PE/VC in 2015
Media was by far the best-performing sector for both the quarter and year, returning an eye-popping 30.2% and 55.8%, respectively, to investors. The second-best performer for the quarter was manufacturing, with a 7.5% return, and for the year was IT, posting a 21.2% return. The seven largest sectors comprised nearly 82% of the index and returned 6.8% for the quarter and 13.4% for the year. The energy sector, which in 2015 fell to under 3% of the index, returned -0.3% for the quarter and -21.6% for the year.
China Continues to Dominate Emerging Markets PE and VC; Chinese Firms Outperformed Index, Received and Returned More Capital Than Companies in Other Countries
Companies based in three countries – China, India and South Korea – represented 62% of the emerging markets PE/VC index’s value, and their combined dollar-weighted return was 8.3% in Q4 2015. Other countries made up less than 5% each of the index. China-based companies continued to receive and return more capital than firms in any other region; during the fourth quarter, the amount invested in Chinese companies was roughly three times what was invested in business in the next largest country, India.
China-based companies returned 10.0% for the quarter and 21.4% for the year, which outpaced the emerging markets PE/VC index’s gross return by a sizable 1,100 basis points. Vintage years 2007, 2008, 2010, 2011 and 2012 were the drivers of this strong performance. India, while barely positive in Q4 (0.5%), did post a return of 8.0% for the year. Vintages 2010, 2012 and 2013 buoyed South Korea’s performance, but underperformance among 2005 and 2007 vintage funds partially offset those gains. South Korean firms returned 6.3% in Q4 and 4.4% in 2015.
For additional details on the performance of the Cambridge Associates global private equity and venture capital benchmarks in the fourth quarter please click here.
About the Indexes
Cambridge Associates derives its Global ex US Developed Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex US private equity and venture capital funds. As of December 31, 2015, the database comprised 790 global ex US developed markets private equity and venture capital funds formed from 1986 to 2015 with a value of about $253 billion. Ten years ago, as of December 31, 2005, the benchmark index included 408 global ex US developed markets funds, whose value was roughly $90 billion.
Cambridge Associates derives its Emerging Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex US private equity and venture capital funds. As of December 31, 2015, the database comprised 565 emerging markets funds formed from 1986 to 2015 with a value of about $158 billion. Ten years ago, as of December 31, 2005, the benchmark index included 243 emerging markets funds, whose value was nearly $17 billion.
About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Working alongside its early clients, among them several leading universities, it pioneered the strategy of high equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for these leading fiduciary investors. Cambridge Associates serves over 1,000 global investors and delivers a range of services, including investment advisory, outsourced investment solutions, research and tools, and performance monitoring, across global asset classes. Cambridge Associates has more than 1,200 employees – including over 150 research staff – serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; Menlo Park and San Francisco, CA; London; Singapore; Sydney; and Beijing. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.
Cambridge Associates has been selected to provide data and to develop and maintain customized industry benchmarks for a number of prominent industry associations, including the African Private Equity and Venture Capital Association (AVCA); Australian Private Equity & Venture Capital Association Limited (AVCAL); Canada’s Venture Capital and Private Equity Association (CVCA); the Hong Kong Venture Capital and Private Equity Association (HKVCA); the Indian Private Equity and Venture Capital Association (IVCA); Institutional Limited Partners Association (ILPA); the Latin American Private Equity and Venture Capital Association (LAVCA); the National Venture Capital Association (NVCA); and the New Zealand Private Equity & Venture Capital Association Inc. (NZVCA). Cambridge Associates also provides data and analysis to the Emerging Markets Private Equity Association (EMPEA).
Both the Cambridge Associates LLC U.S. Private Equity Index® and the Cambridge Associates LLC U.S. Venture Capital Index® are reported each week in Barron’s Market Laboratory section. In addition, complete historical data can be found on Standard & Poor’s Micropal products and on our website, www.cambridgeassociates.com.
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