US Private Equity Funds Return 0.2%; US Venture Capital Funds Return -3.3% In 1Q 2016
BOSTON (September 19, 2016) – Private equity and venture capital funds in the US showed lackluster performance in the first quarter of 2016, according to Cambridge Associates benchmark indices of the two alternative asset classes.
The Cambridge Associates LLC US Private Equity Index® returned 0.2% in Q1 2016, the third consecutive quarter with a return of less than 0.5%. And the Cambridge Associates LLC US Venture Capital Index® posted a -3.3% return, giving up some of the gains of recent quarters.
The first quarter of 2016 was a difficult period for private and public equity alike, with continued slow economic growth and a lackluster IPO market. The NASDAQ and Russell 2000 both posted negative returns, while the S&P 500 rose only 1.3%.
Cambridge Associates derives its US PE and VC Indices from the financial information contained in its proprietary database of 1,270 US PE and 1,633 US VC funds, with a combined value of roughly $773 billion.
Table 1. US Private Equity and Venture Capital Index Returns (IRR)
USD Terms • Percent (%)
Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s, and Thomson Reuters Datastream.
Notes: Private indexes are pooled horizon internal rates of return, net of fees, expenses and carried interest.
*Constructed Index: Data from 1/1/1986 to 10/31/2003 represented by Nasdaq Price Index. Data from 11/1/2003 to present represented by Nasdaq composite. Public index returns are shown as both time-weighted returns (average annual compound returns) and dollar-weighted returns (modified public market equivalent or mPME). The Cambridge Associates mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.
Private Equity Performance Insights
“Though Q1 was not the best quarter for PE returns, the asset class did outperform the Russell 2000 and the Nasdaq during the period. And history demonstrates that disciplined, long-term investors have reaped the benefits of investing in private equity, which have outpaced the public markets over the last 10, 15, 20 and 25 years,” said Keirsten Lawton, co-head of US Private Equity Research at Cambridge Associates.
Private Equity Distributions and Contributions
Distributions from US PE funds to investors continued to outpace contributions called by fund managers in this year’s first quarter, though both amounts fell from their levels in Q4 2015. Fund managers called $16.7 billion and distributed only $17.7 billion, a 52% drop from the previous quarter and the lowest quarterly level in four years.
Private Equity Vintage Year Performance
Of the meaningfully sized vintage years in the US PE Index – which each represent at least 5% of the benchmark’s value – the worst-performing was 2008. Funds of that vintage returned -0.7% in Q1 2016, driven primarily by write-downs of energy companies. Consumer and healthcare companies dominated the write-ups in vintage 2009 funds, which was the best-performing vintage with a 2.2% return.
Private Equity Sector Performance
Five of the seven sectors that represented at least 5% of the index – consumer, healthcare, IT, manufacturing and software – earned positive returns during the quarter. The other two meaningfully sized sectors, energy and financial services, posted returns of -2.7% and -2.0%, respectively.
Venture Capital Performance Insights
“Venture capital funds in the US posted a negative return in Q1 of this year – the first negative quarterly return since the fourth quarter of 2008. Despite the venture market’s cyclicality, the VC Index did outpace public markets over the last one-, three-, five-, 10-, 20- and 25-year periods – though it underperformed over the last 15-year period, due to the bursting of the early-2000s venture bubble dragging down the industry return,” said Theresa Hajer, Managing Director, Private Growth Research at Cambridge Associates.
Venture Capital Distributions and Contributions
Distributions from US VC funds to investors outpaced contributions to fund managers in Q1 2016, as they have every quarter since the beginning of 2012. US venture managers called $2.5 billion from investors during this year’s first quarter, a 27.2% decrease from Q4 2015. And distributions from venture funds were $3.7 billion, almost a 50% decrease from the previous quarter and the lowest quarterly output since Q1 2013.
Venture Capital Vintage Year Performance
Of the eight vintage years in the US VC Index that were meaningfully sized in Q1 2016 – that is, represented at least 5% of the index – only vintage 2014 funds posted a positive return for the quarter, generating a 0.2% return for investors. 2008 was the worst-performing vintage in the index Q1, with a -6.1% return.
Venture Capital Sector Performance
The three largest sectors in the index – healthcare, IT and software – each had negative returns in the first quarter of this year. These sectors accounted for 25.2%, 33.2% and 23.7% of the value of the index, respectively. Returns for these sectors in Q1 ranged from -0.2% for software to -7.2% for healthcare.
For additional details on the performance of the Cambridge Associates private equity and venture capital benchmarks in the first quarter of 2016, please click here.
About the Indices
Cambridge Associates derives its US private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of March 31, 2016, the database comprised 1,270 US buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2015, with a value of nearly $588 billion. Ten years ago, as of March, 31, 2006, the index included 687 funds whose value was nearly $217 billion.
Cambridge Associates derives its US venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of March 31, 2016, the database comprised 1,633 US venture capital funds formed from 1981 to 2016, with a value of roughly $185 billion. Ten years ago, as of March 31, 2006, the index included 1,117 funds whose value was $66 billion.
Because the US Private Equity and Venture Capital indexes are capital weighted, the largest vintage years mainly drive the indexes’ performance. Public index returns are shown as both time-weighted returns (average annual compound returns) and dollar-weighted returns (modified public market equivalent or mPME). The Cambridge Associates mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME net asset value is a function of mPME cash flows and public index returns. Over any one quarter, an mPME and time-weighted return will match, but they will begin to diverge over longer time horizons because the mPME calculation takes into account the size and timing of cash flows.
About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Today the firm serves nearly 1,000 global investors and delivers a range of services, including investment consulting, outsourced investment solutions, research and tools (OptiCA digital platform), and performance monitoring, across asset classes. The firm compiles the performance results for more than 5,600 private partnerships and their nearly 70,000 portfolio company investments to publish its proprietary private investments benchmarks, of which the Cambridge Associates LLC U.S. Venture Capital Index® and Cambridge Associates LLC U.S. Private Equity Index® are widely considered to be among the standard benchmark statistics for these asset classes. Cambridge Associates has more than 1,200 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; San Francisco; Menlo Park, 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.
This release is provided for informational purposes only and is not intended to be investment advice. Any references to specific investments are for illustrative purposes only. The information herein does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. This release is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not a guarantee of future returns. With regard to any references to securities indices, such indices are unmanaged and are not subject to fees and expenses typically associated with managed accounts or investment funds. Investments cannot be made directly in an index.
Inquiries about these indices should be addressed to: Eric Mosher at Sommerfield Communications, 55 Broad Street, 20th Floor, New York, NY 10004; 212.255.8386; (fax) 212.255.8459; firstname.lastname@example.org.