News

October 2016

PE, VC Funds in Developed Markets Outside the U.S. Beat Public Markets in 1Q 2016; Performance in Emerging Markets Weaker

BOSTON (October 19, 2016) – Private equity and venture capital funds in developed markets outside the U.S. outperformed public markets in the same regions in the first quarter of 2016. However, private investment funds in emerging markets barely broke even and significantly underperformed the comparable public markets.

The Cambridge Associates LLC Global ex U.S. Developed Markets PE/VC Index® returned 4.5% measured in U.S. dollars to investors, compared with a return of -3.0% from the MSCI EAFE, the comparable public equity index. Developed markets private investments were helped in part by a strengthening euro.

But the Cambridge Associates LLC Emerging Markets PE/VC Index® only eked out a 0.2% return in Q1, compared to 5.8% from its public market counterpart, the MSCI Emerging Markets Index.

“In developed markets outside the U.S., private equity and venture capital funds have outperformed public markets in the same regions consistently and for decades – often by a margin of over five percentage points,” says Andrea Auerbach, Head of Global Private Investments at Cambridge Associates.

“In emerging markets overall, private equity and venture capital funds did not perform particularly well in Q1 2016, but comparisons to the public market should be made with a long-term perspective. Companies based in China and India currently dominate the emerging markets index, though other regions are growing; Latin America now makes up almost 5% of the index and is a growing opportunity for private investors,” says Vish Ramaswami, Managing Director at Cambridge Associates.

Cambridge Associates derives its Global ex U.S. PE and VC Indices from the financial information contained in its proprietary database of 805 global ex U.S. developed markets funds and 575 emerging markets funds, with a combined value of roughly $411 billion.

Table: Returns for the Global ex U.S. Developed and Emerging Markets PE/VC Indexes vs Public Counterparts

Periods Ended March 31, 2016 • Percent (%)

1q-ex-us-benchmark-release-cambridge-associates

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: The PE/VC indexes are pooled horizon internal rates of return and are based on limited partners’ fund-level performance; the returns are net of fees, expenses, and carried interest. Because the indexes are capital weighted, performance is mainly driven by the largest vintage years. Public index returns are shown as both time-weighted returns (average annual compound returns) and dollar-weighted returns (modified public market equivalent). The Cambridge Associates mPME calculation is a private-to-public comparison that seeks to replicate private investment performance under public market conditions.

*Returns for the MSCI Emerging Markets Index began 1/1/1988; to match the 1986 inception of the Emerging Markets PE/VC Index, price returns from Global Financial Data are used for the period 1/1/1986 to 12/31/1987.

Some highlights from the Global ex U.S. Developed Markets PE/VC Index in Q1 2016:

  • PE/VC Distributions and Contributions in Developed Markets Outside the U.S.: Distributions from developed markets PE and VC funds to investors continued to outpace contributions to managers in the first quarter of 2016 – a trend that has largely held true since the final quarter of 2010 – though both distributions and contributions fell from their levels in Q4 2015. Contributions decreased by 51% to $4.5 billion, while distributions saw a 24% drop to $15.7 billion. 2006-vintage funds returned almost $6 billion to investors.
  • PE/VC Sector Performance in Developed Markets Outside the U.S.: Among the key sectors in the developed markets index, manufacturing companies performed best in Q1, generating 7.2% returns at the company level. The manufacturing sector was followed by the software and consumer sectors, each of which returned 5.1%. Consumer companies attracted the most capital of any sector during the quarter, collecting 42% of the capital invested in Q1.
  • PE/VC Vintage Year Performance in Developed Markets Outside the U.S.: Every vintage year in the developed markets index (from 1994 through 2015) posted positive returns in the first quarter of 2016. Of the “meaningfully sized” vintages – each one that made up at least 5% of the total index – the best performer was 2012, which returned 7.5%. Increased valuations of firms in the financial services, consumer and energy sectors contributed to the 2012 vintage’s strong returns.
  • PE/VC Performance by Country in Developed Markets Outside the U.S.: Companies based in the United Kingdom, France, Germany, Sweden and the United States accounted for the bulk of the developed markets index in the first quarter of the year. Returns ranged from -0.3% for U.K.-based firms to 6.6% for companies based in Germany.

A few highlights from the Emerging Markets PE/VC Index in Q1 2016:

  • PE/VC Distributions and Contributions in Emerging Markets: Emerging market private equity and venture capital managers called $3.6 billion from investors in Q1 2016, a 26% decrease from Q4 2015, and they distributed $4.6 billions to investors, a 22% fall from the previous quarter. Managers of 2007-vintage funds accounted for 41% of the quarter’s distributions – almost $2 billion.
  • PE/VC Sector Performance in Emerging Markets: Manufacturing and health care companies represented the emerging markets index’s brightest spots in an otherwise pedestrian quarter, returning 3.8% and 3.0%, respectively. Financial services (-3.3%) and electronics (-0.5) were the two sectors with negative returns in Q1. Software companies received 19% of the capital invested during the quarter.
  • PE/VC Vintage Year Performance in Emerging Markets: The only “meaningfully sized” vintage year in the emerging markets index – representing more than 5% of the index – that generated a return higher than 1% was 2010. Its 4.2% return was caused by write-ups of IT, software and transportation companies. The lowest-performing vintage, 2008, returned -2.5% because of large losses in energy, environment and media companies.
  • PE/VC Performance by Country in Emerging Markets: China and India continue to be the powerhouses of emerging markets private equity and venture capital, representing 47.4% and 8.0% of the index, respectively. Companies in both countries generated negative returns. Chinese companies struggled due to write-downs in vintages 2006 through 2011 and returned -1.5%; Indian companies returned slightly more: -0.5%.

For additional details on the performance of the Cambridge Associates private equity and venture capital benchmarks in the first quarter of 2016, please visit here.

About the Indices

Cambridge Associates derives its Global ex U.S. Developed Markets Private Equity and Venture Capita Index from the financial information contained in its proprietary database of global ex U.S. private equity and venture capital funds. As of March 31, 2016, the database comprised 805 global ex U.S. developed markets private equity and venture capital funds formed from 1986 to 2015, with a value of about $252 billion. Ten years ago, as of March, 31, 2006, the benchmark index included 416 global ex U.S. developed markets funds, whose value was roughly $95 billion. The funds in this index invest primarily in developed markets in Australia, Canada, Israel, Japan, New Zealand, Singapore, and Western Europe.

Cambridge Associates derives its Emerging Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex venture capital funds. As of March 31, 2016, the database comprised 1,633 U.S. 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 U.S. 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

Cambridge Associates is a global investment firm founded in 1973 that builds customized investment portfolios for institutional investors and private clients around the world. Working alongside its early clients, among them several leading universities, the firm 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 – primarily foundations and endowments, pensions and family offices – and delivers a range of services, including outsourced investment (OCIO) solutions, traditional consulting services, and access to research and tools across global asset classes. Cambridge Associates has more than 1,300 employees – including over 150 research staff – serving its client base globally.  The firm 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.

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; eric@sommerfield.com.