Emerging Markets PE/VC Index Delivers Negative Returns for First Quarter Since 2012, Still Outperforms Public Counterpart Significantly; Energy Investments in ex US Developed Markets Down 7% for the Quarter
Boston (March 29, 2016) – Private equity and venture capital in ex US developed markets and emerging markets delivered negative returns in the third quarter of 2015, but they managed to outperform public markets in those regions substantially, according to global institutional investment advisor Cambridge Associates LLC.
The Cambridge Associates LLC Global ex US Developed Markets Private Equity and Venture Capital Index returned -0.6% for the quarter ending September 30, 2015, as measured in US dollars. Its public market counterpart, the MSCI EAFE, fell -10.2% over the same period – a much steeper decline. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index posted a -4.8% drop for the quarter – a sharper fall than was seen in ex US developed markets. But it still outperformed its counterpart, the MSCI Emerging Markets index, which returned -17.8%.
“Low commodity prices wreaked havoc on the energy sectors in these indexes. Though energy accounts for less than 5% of the ex US developed markets index, its -7% return certainly contributed to the overall negative performance of the index in the third quarter of 2015,” said Andrea Auerbach, Managing Director and Head of Global Private Investment Research at Cambridge Associates. “And despite negative returns in the developed and emerging indexes, each considerably surpassed the performance of its public counterpart.”
Q3 Insights from the CA Global ex US Developed Markets Private Equity and Venture Capital Index
Majority of Vintages Posted Negative Returns; Contributions Up, Distributions Down – But Distributions Still Higher, Continuing Trend
In a sharp reversal from the previous quarter, 11 of the 16 vintage years (2000 to 2015) in the ex US developed markets index posted negative returns. Of the seven “meaningfully sized” vintages, each of which represented more than 5% of the index, the lowest return was -3.3%, from funds raised in 2006. The main drivers of this vintage year’s negative performance were write-downs in financial services, energy, chemicals and IT. The highest return from any of the seven large vintages in Q3 2015 was 2.2%, from funds raised in 2011.
Distributions outpaced contributions in the third quarter of 2015, which has been the case in 16 of the last 19 quarters. Developed markets private equity and venture capital funds called $8.0 billion from investors during the quarter, a 3% increase from the previous quarter. Distributions totaled $14.8 billion – a 15% drop from Q2. Managers of funds raised in 2010, 2012 and 2013 called 73% of the total capital called during Q3. The vintage years from 2005 through 2008, along with 2012, accounted for 79% of distributions in the quarter.
Four Largest Sectors Returned a Flat 0.0%; Negative Returns from Companies in the United States, Australia, Canada
In the third quarter, the consumer and financial services sectors returned -2.0% and -2.1%, respectively. Meanwhile, the health care sector saw an impressive 4.1% rise. The four largest sectors – consumer, health care, IT and financial services – represented nearly 60% of the index’s value and returned 0.0% on a dollar-weighted basis. The consumer and health care sectors together attracted nearly half of the capital invested during the quarter.
Companies in France, Germany, Sweden and the UK earned positive returns overall, while companies in the United States – representing nearly 18% of the index – returned -3.6%. Other countries with negative returns for the quarter included Australia and Canada, which together accounted for 5% of the index. Companies in Canada sustained the largest losses in the index – due in large part to volatility in commodity prices.
Q3 Insights from the CA Emerging Markets Private Equity and Venture Capital Index
The Third Quarter Saw a Range of Negative Returns From Funds Raised Between 2004 and 2013; Six Largest Sectors Returned -5.0% Altogether; Distributions Outpaced Contributions
All vintages from 2004 through 2013 earned negative returns for the quarter, ranging from -12.5% at the lowest (2005) to -1.4% at best (2011). Write-downs in nearly all sectors in the index drove the poor performance in Q3, with significant decreases in consumer, IT and manufacturing. All six of the meaningfully sized sectors posted negative returns for the quarter, returning -5.0% altogether. Health care earned the best return at -1.1%, while manufacturing earned the lowest return at -11.8%.
Distributions outpaced contributions $4.0 billion to $3.7 billion in the third quarter, which is unusual. Since the inception of the index in 1986, distributions have outpaced contributions in only 12% of the quarters.
China and India Remain Dominant Countries in Index
Companies in China and India together represent approximately 54% of the index – 45.9% and 8.6%, respectively. Companies in these two countries returned a combined -4.8%, on a gross, dollar-weighted basis. China-based companies continued to receive more capital than any other country, 38% of the index. Write-downs for Chinese companies represented 52% of the total net valuation changes for the quarter.
By the end of the quarter, South Korea had dropped to less than 5% of the index to 4.7%. In addition to South Korea, companies in Singapore, the United States and Japan each represented at least 2.5% of the index. Write-downs for South Korean companies represented 15% of the total net valuation changes in the third quarter.
For more detailed information please see the Cambridge Associates commentary on the Q3 2015 global ex US benchmarks.
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 September 30, 2015, the database comprised 777 global ex US developed markets private equity and venture capital funds formed from 1986 to 2015 with a value of about $258 billion. Ten years ago, as of September 30, 2005, the benchmark index included 386 global ex US developed markets funds, whose value was roughly $81 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 September 30, 2015, the database comprised 560 emerging markets funds formed from 1986 to 2015 with a value of about $151 billion. Ten years ago, as of September 30, 2005, the benchmark index included 229 emerging markets funds, whose value was $15 billion.
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.