Meanwhile, Private Investment Funds in Emerging Markets Underperformed Their Public Market Counterparts In 2016, According to Benchmarks
Boston, MA (August 29, 2017) – Private equity (PE) and venture capital (VC) managers based in developed markets outside the US outperformed the comparable public markets in 2016, according to benchmark indexes of the asset classes in the region from global investment firm Cambridge Associates.
Meanwhile, PE and VC managers in emerging markets underperformed public markets in the region last year, according to the Cambridge Associates benchmark indexes.
The Cambridge Associates LLC Global ex US Developed Markets PE/VC Index® returned 0.9%, measured in US dollars, to investors in the fourth quarter of 2016, and returned 11.7% for the year. The Developed Markets Index outperformed the MSCI EAFE index, which measures public equity performance in developed markets outside the US, for the quarter and year; the public index returned -0.7% and 0.9%, respectively, measured in US dollars. (See table below.)
“Private investment managers in developed markets outside the US continue to demonstrate their ability to outperform public markets and generate returns for investors,” says Andrea Auerbach, Head of Global Private Investments at Cambridge Associates.
The Cambridge Associates LLC Emerging Markets PE/VC Index® generated a 0.8% return for the fourth quarter of 2016 and a 4.6% return for the full year. The Emerging Markets Index returned more in the fourth quarter than its public market counterpart, the MSCI Emerging Markets Index, which tracks public markets in emerging market economies and generated returns of -4.1% in Q4. However, the MSCI Emerging Markets Index returned 11.4% for the year, outperforming the Cambridge Associates Emerging Markets Index.
“Chinese firms continue to represent almost half of the Emerging Markets Index, though South Korean firms comprise a growing percentage of the index. And companies based in India generated notably strong returns last year,” says Vish Ramaswami, Managing Director at Cambridge Associates.
Cambridge Associates derives its Global ex US PE/VC Indexes from the financial information contained in its proprietary database of 863 PE and VC funds in developed markets outside the US and 627 PE and VC funds in emerging markets, with a combined value of roughly $426 billion.
Table 1. Returns for the Global ex US Developed and Emerging Markets PE/VC Indexes vs Public Counterparts
Periods Ending December 31, 2016 • 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: 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 replicates private investment performance under public market conditions. The public index’s shares are purchases 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.
*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.
A few highlights from the Global ex US Developed Markets PE/VC Index in 2016:
• Distributions to Investors in ex US Developed Markets Index Outpaced Contributions for Sixth Consecutive Year. In the fourth quarter of 2016, fund managers in the ex US Developed Markets Index called $10.4 billion from investors and returned $17.3 billion, the highest quarterly distribution in 2016. For the full year, both contributions and distributions were down compared to previous years, but distributions outpaced contributions for the sixth consecutive year.
• Materials Companies Generated Strongest Returns in ex US Developed Markets Index for Q4 2016 and the Full Year. Fourth quarter and full-year returns were positive for the six sectors in the ex US Developed Markets Index that were meaningfully sized – i.e., each represented at least 5% of the index – consumer discretionary, financials, health care, industrials, IT and materials. Materials companies generated the strongest returns for the fourth quarter and the year: 3.5% and 22.3%, respectively.
• Ex US Developed Market PE/VC Funds Raised in 2007 Were Strongest Performers in 2016. Funds in the ex US Developed Markets Index that were raised in 2013 posted the highest return in Q4, 4.8%, while funds raised in 2006 posted the lowest quarterly return at -1.9%. For the full year, funds raised in 2007 generated the highest returns, 20.5%.
• Portfolio Companies in ex US Developed Markets Index Based in the Netherlands Led in the Fourth Quarter of 2016 and the Year. Portfolio companies in the ex US Developed Markets Index based in the Netherlands returned 6.3% for the fourth quarter and 31.7% for the year, the highest of any country in the index. Firms based in the UK performed worst, with quarterly returns of -1.4% and a return of -2.7% for the full year.
Figure 1. Global ex US Developed Markets Contributions, Distributions, and Net Asset Value (NAV)
Calendar Years 2005-16
Some highlights from the Emerging Markets PE/VC Index in 2016:
• Contributions from and Distributions to Investors in Emerging Markets Index Fell from 2015 Levels in 2016. During the fourth quarter, managers in the Emerging Markets Index called $7.1 billion from investors and distributed $5.7 billion. For the full year, distributions narrowly outpaced contributions, $20 billion to $19.7 billion, and both measures fell for the second consecutive year.
• Weakest Returns in Fourth Quarter 2016 and Strongest Returns for Full Year in Emerging Markets Index Came from Consumer Staples Companies. Investments in consumer staples companies in the Emerging Markets Index generated the lowest return by sector in Q4, -2.6%, and the best return for the full year, 15.1%.
• Funds in Emerging Markets Index Raised in 2014 Performed Best in 2016. Funds in the Emerging Markets Index that performed best in Q4 were those raised in 2012, with a 4.6% return, while the worst performers in the fourth quarter were funds raised in 2006, at -2.8%. Funds raised in 2014 performed best for the full year, returning 12.4%, followed by 2013 vintage funds, which returned 10.4%.
• Chinese Firms Continue to Represent Almost Half of Emerging Markets Index. Firms based in China made up 46.1% of the Emerging Markets Index as of December 31, 2016, and returned 1.0% in Q4 2016 and 2.8% for the full year. Companies based in India, which comprise 8.3% of the index, returned an unimpressive 0.5% for the fourth quarter but 11.6% for the year, a strong return.
Figure 2. Emerging Markets Contributions, Distributions, and Net Asset Value (NAV)
Calendar Years 2005-16
For additional details on the performance of the Cambridge Associates global private equity and venture capital benchmarks in the fourth quarter of 2016, 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, 2016, the database comprised 863 global ex US developed markets private equity and venture capital funds formed from 1986 to 2016, with a value of about $251 billion. Ten years ago, as of December 31, 2016, the benchmark index included 477 global ex US developed markets funds, whose value was roughly $140 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 US private equity and venture capital funds. As of December 31, 2016, the database comprised 627 emerging markets funds formed from 1986 to 2016, with a value of about $175 billion. Ten years ago, as of December 31, 2006, the benchmark index included 283 emerging markets funds, whose value was over $27 billion. The funds in this index invest primarily in Africa, emerging Asia, emerging Europe, Latin America & Caribbean, and the Middle East ex Israel.
The pooled returns represent the net periodic rates of return calculated on the aggregate of all cash flows and market values as reported to Cambridge Associates by the funds’ general partners in their quarterly and annual audited financial reports. These returns are net of management fees, expenses and performance fees that take the form of carried interest.
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 1,100 global investors – primarily foundations and endowments, pensions and family offices – and delivers a range of services, including outsourced investment (OCIO) solutions; investment consulting services; and access to investment research and tools across global asset classes. With every client, the firm aims to generate outperformance so they can maximize their impact on the world.
Cambridge Associates has more than 1,200 employees serving its client base globally. The firm maintains offices in Arlington, VA; New York; Boston; Dallas; Menlo Park and San Francisco, CA; Toronto; London, UK; 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.