Private Equity Invested in both ex U.S. Developed and Emerging Markets Earned Positive Returns and Outperformed its Public Market Counterpart in Q2
Distributions in the Emerging Markets Index in Q2 Hit an All-time High
BOSTON (Dec. 17, 2014) – The second quarter of 2014, like the first, brought positive returns for private equity and venture capital funds that invest primarily in global ex U.S. developed and emerging markets. Both alternative asset classes outperformed comparable public equity indexes for the first six months of 2014, though in Q2 only private equity investments in global ex U.S. developed markets did so, according to global institutional investment advisor Cambridge Associates LLC (CA).
The Cambridge Associates LLC Global ex U.S. Developed Markets Private Equity and Venture Capital Index rose 4.9% in the quarter ending June 30, 2014. This put the index up 8.5% at the half-year mark. For comparison, the MSCI EAFE increased 4.1% and 4.8% over the same periods, respectively. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index gained 4.6% in Q2 and 7.5% for the first half. The respective returns for its public equities counterpart, the MSCI Emerging Markets index, were 6.7% and 6.3%.
The following table shows the performance of the two CA benchmarks against their public equity counterparts over various time periods ending on June 30, 2014.
Global ex Developed and Emerging Markets Private Equity and Venture Capital Indices
Returns (%) in U.S. Dollars
|For the periods endingJune 30, 2014||Qtr.||YTD||1Year||3Years||5Years||10Years||15Years||20Years|
|Ex-US Developed MarketsPE and VC||4.9||8.5||24.3||9.4||15.1||14.5||14.2||14.6|
|Emerging MarketsPE and VC||4.6||7.5||19.9||8.3||14.4||12.7||9.4||8.8|
Public Market Indices
|MSCI Emerging Markets||6.7||6.3||14.7||-0.1||9.6||12.3||9.2||6.6|
Sources: Cambridge Associates LLC, MSCI Inc., Standard & Poor’s, and Thomson Reuters Datastream. MSCI data provided “as is” without any express or implied warranties.
The CA developed markets index outperformed the MSCI EAFE over every time period shown in the table above, with the spread particularly wide between the two over the longer timeframes. The CA emerging markets index did almost as well against its public equity counterpart, beating out the MSCI Emerging Markets index in every time period shown except the second quarter.
Geographic concentration continued to be a theme of both CA indices, with investments in Western European companies dominating the developed markets index. And investments in companies located in China and India dominated the emerging markets benchmark – together, the two countries comprised 46.8% of the emerging markets index by weight. However, while only China and India each accounted for more than 5% of the emerging markets index, an additional five countries each accounted for more than 3%.
Q2 Highlights from the CA Global ex U.S. Developed Markets Private Equity and Venture Capital Index
Distributions Outstripped Contributions for the 9th Consecutive Quarter
In the second quarter, fund managers in the developed markets index continued a recent pattern for the benchmark, distributing more capital than they called for the ninth straight quarter. Fund managers called $6.2 billion from their investors during the period, down 28% from the previous quarter. Distributions, however, increased 62% over Q1 to $14.7 billion.
“This trend of distributions to LPs exceeding contributions from LPs is now in its third year, which I’m sure LPs are appreciating! The biggest beneficiaries of this quarter’s distributions were investors [limited partners or LPs] in funds launched in 2005 through 2008. On the contributions side, managers of funds raised in 2007, 2008, and 2010 through 2012 accounted for 89% of the total capital called during the quarter,” said Andrea Auerbach, Managing Director and Head of Global Private Investment Research at Cambridge Associates.
The Number of Influential Vintage Years Increased during Q2 – All Had Positive Returns for the Period
The developed markets index was highly concentrated by vintage year in Q1, with only four vintages being significantly sized (accounting for 5% or more of the index). By the end of Q2 that number had increased to six vintages, which collectively accounted for almost 82% of the benchmark. Returns among the six ranged from a high of 10.1% for funds raised in 2011 to a low of 2.1% for the 2005 vintage year funds.
The biggest driver of the 2011 vintage’s double-digit return was write-ups on investments in consumer companies, though the return was also helped by sizable write-ups in health care, manufacturing, and software. The quarterly return for the 2005 funds was dragged down primarily by losses on investments in energy and information technology (IT) companies.
Media was by Far the Top Performing Sector in Q2
Seven sectors in the benchmark were significantly sized at the end of Q2 and all had positive returns for the period. Quarterly returns across the top sectors ranged widely, from a high of 18.9% for media to 2.5% for IT. Media’s return for the period extended a string of strong quarters for that sector that began in 2012.
The three largest sectors in the index – consumer, health care, and IT – represented almost half of the benchmark’s value and, on a dollar-weighted basis, returned 4.0% for the quarter.
All Five of the Largest Markets Had Positive Returns in Q2
Investments in companies headquartered in Western Europe dominated the developed markets index. Four out of the five meaningfully-sized regions in the benchmark at the end of Q2 were located there: France, Germany, Sweden, and the U.K. The lone exception was the U.S. All five had positive returns. Companies based in France led the way with a 10.0% return for the quarter, followed by Germany’s 8.0%. Companies in Sweden had the lowest return for the period: 1.8%.
Q2 Highlights from the CA Emerging Markets Private Equity and Venture Capital Index
Distributions in the Emerging Markets Index Hit Record High
Calls and distributions in the emerging markets index were both up significantly in Q2 over the prior quarter. Fund managers in the benchmark called $4.7 billion from their investors during the period – a 35% increase over Q1. Distributions were up 66% over the prior quarter to $7.1 billion, which was by far the largest quarterly return in the history of the benchmark.
Investors in funds raised in 2011 contributed 48% of the total capital called during Q2, while LPs in the 2006 and 2007 vintage year funds together received 84% of the quarter’s distributions.
String of 21st Century Vintage Years Dominated the Emerging Markets Index
Seven consecutive vintages – from 2005 to 2011 – comprised the only meaningfully-sized vintage years in the emerging markets benchmark; all of them had positive returns for the quarter. Returns of the seven ranged from a high of 6.7% for the 2011 vintage year funds to a low of 1.9% for the 2008 vintage.
Together, the seven largest vintage years represented more than 92% of the emerging markets index. The largest single vintage, the 2007 funds, represented almost one-third of the index and returned 5.3%.
IT was the Best Performing Sector in the Emerging Markets Index in Q2
All six meaningfully-sized sectors in the emerging markets benchmark had positive returns for the quarter; together, the six sectors represented about three-fourths of the index. IT was the highest earning large sector, returning 13.4% for the second period. Health care and manufacturing tied for the weakest performance of the top six sectors – each gained 2.1%.
India Had the Highest Return among the Seven Countries that Contributed the Most to the Benchmark’s Return
While India and China again dominated the emerging markets benchmark by size – together, the two countries represented almost 47% of the index – five more countries contributed to the index’s return, with each representing more than 3% of the index at quarter’s end: Australia, Russia, Brazil, South Korea, and Singapore.
On a dollar-weighted basis, China and India returned 5.5% in Q2. India returned 10.0% for the period, the highest of any country representing more than 3% of the index. Companies headquartered in China returned 4.1%.
For more detailed information please see the Cambridge Associates commentary on the Q2 benchmarks at http://www.cambridgeassociates.com/our-insights/research/global-ex-us-pevc-benchmark-commentary-3/.
About the Indices
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 June 30, 2014, the database comprised 713 global ex US developed markets private equity and venture capital funds formed from 1986 to 2014 with a value of about $297 billion. Ten years ago, as of June 30, 2004, the benchmark index included 334 global ex US developed markets funds, whose value was roughly $64 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 June 30, 2014, the database comprised 538 emerging markets funds formed from 1986 to 2014 with a value of about $138 billion. Ten years ago, as of June 30, 2004, the benchmark index included 192 emerging markets funds, whose value was $14.5 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. Today the firm serves over 1,000 global investors and delivers a range of services, including investment advisory, outsourced investment solutions, research and tools (Research Navigator and Benchmark Calculator), and performance monitoring, across asset classes. The firm compiles the performance results for over 5,600 private partnerships and their more than 70,000 portfolio company investments to publish proprietary private investments benchmarks. Cambridge Associates has more than 1,100 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; 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 Institutional Limited Partners Association (ILPA), Australian Private Equity & Venture Capital Association Limited (AVCAL); the African Venture Capital Association (AVCA); the Hong Kong Venture Capital and Private Equity Association (HKVCA); the Indian Private Equity and Venture Capital Association (IVCA); the New Zealand Private Equity & Venture Capital Association Inc. (NZVCA); the Asia Pacific Real Estate Association (APREA); and the National Venture Capital Association (NVCA). Cambridge also provides data and analysis to the Emerging Markets Private Equity Association (EMPEA).