PE and VC Funds in Developed Markets Outside U.S. Returned 1.3% in Q2 2016; Emerging Market PE and VC Funds Returned 0.7% Over Same Period
Boston (January 10, 2017) – Private equity (PE) and venture capital (VC) funds based in developed markets outside the U.S. continued to outperform public markets in the regions in the second quarter of 2016. Strong returns from investments in health care, IT, manufacturing and software companies contributed to the positive Q2 2016 returns for PE and VC funds in non-U.S. developed markets.
The Cambridge Associates LLC Global ex U.S. Developed Markets PE/VC Index® returned 1.3%, measured in U.S. dollars, to investors in the second quarter of 2016, compared with a return of -1.5% by the MSCI EAFE, which measures public equity performance in developed markets outside the U.S. (See table below.)
“Private equity and venture capital funds based in non-U.S. developed markets have continued to generate strong returns for investors, compared with public markets. For every time period longer than a year, the ex U.S. Developed Markets PE/VC Index beat the MSCI EAFE, the comparable public market index, by at least 500 basis points,” says Andrea Auerbach, Head of Global Private Investments at Cambridge Associates.
Over the same quarter, the Cambridge Associates LLC Emerging Markets PE/VC Index® generated a 0.7% return, slightly lower than the 0.8% return posted for the quarter by the comparable MSCI Emerging Markets Index, which tracks public markets.
“Companies based in China, which make up almost half of the Emerging Markets PE/VC Index, posted a slightly negative return and underperforming the index as a whole. Emerging markets private equity and venture capital managers have generally performed better than public markets in the region over longer-term perspectives, such as over the last five, 10 or 20 years,” 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 819 funds in developed markets outside the U.S. and 588 funds in emerging markets, with a combined value of roughly $412 billion.
Table: Returns for the Global ex U.S. Developed and Emerging Markets PE/VC Indexes vs Public Counterparts
Periods Ended June 30, 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 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 Q2 2016:
- PE/VC Distributions and Contributions Dropped in Q2 2016 in Developed Markets Outside the U.S.: Distributions from funds in the ex U.S. Developed Markets PE/VC Index to investors totaled $13.2 billion in the second quarter – a 12% drop from Q1 and a 38% drop from the fourth quarter of 2015. Contributions from investors to fund managers were lower, at $6.9 billion, during Q2.
- Health Care Was Top-Performing Sector in Non-U.S. Developed Markets PE/VC in Q2 2016: Four of six meaningfully sized sectors in the ex U.S. Developed Markets PE/VC Index – each of which made up at least 5% of the Index – generated positive returns in U.S. dollars in the second quarter. The top-performing sector was health care, which returned 2.6%. Financial services companies performed worst in the Index, with a return of -2.3% in Q2.
- PE/VC Funds in Developed Markets Outside the U.S. Raised in 2013 Performed Best in Q2 2016: Returns among the ex U.S. Developed Markets PE/VC Index’s biggest vintage years ranged from -4.1% for funds raised in 2005 to 4.7% for those raised in 2013. Consumer companies contributed to the 2005 vintage’s poor returns, while the hardware sector led 2013 vintage funds’ strong performance for the quarter.
- In Non-U.S. Developed Markets, PE/VC Investments in Companies Based in France and Germany Were Top Performers in Q2 2016: Europe is the main destination for investment capital in the ex U.S. Developed Markets PE/VC Index, and companies based in France, Germany, Sweden and the United Kingdom each comprised more than 5% of the index in Q2 2016. Of those countries, companies based in France and Germany generated positive returns in the quarter, while those based in Sweden and the United Kingdom did not.
A few highlights from the Emerging Markets PE/VC Index in Q2 2016:
- Distributions to and Contributions from PE/VC Managers in Emerging Markets Fell in Q2 2016: During the second quarter of 2016, funds in the Emerging Markets PE/VC Index distributed $3.5 billion to investors, a 31% decrease from total contributions in Q1. Funds in the Index called $3.3 billion from investors in Q2.
- Manufacturing Was Top-Performing Sector Among PE/VC Investments in Emerging Markets in Q2 2016: Most meaningfully sized sectors in the Emerging Markets PE/VC Index – each of which represents at least 5% of the Index – posted positive returns in Q2. Manufacturing led the pack with a 3.7% return, while the IT sector earned the lowest return at -1.6%.
- PE/VC Funds in Emerging Markets Raised in 2009 Were Top Performers in Q2 2016: Funds raised in 2009 performed better than any other vintage in the Emerging Markets PE/VC Index in Q2 2016. Four sectors buoyed returns: consumer, environmental, media and financial services. The worst-performing vintage in the second quarter was 2010, with a -2.7% return.
- Among Emerging Markets, PE/VC Investments in Chinese Companies Generated Negative Returns in Q2 2016: Chinese and Indian companies continued to dominate the Emerging Markets PE/VC Index in Q2 2016, making up 46.5% and 7.9% of the Index, respectively. Chinese companies returned -0.2% during the quarter, while Indian companies posted a 0.8% return.
For additional details on the performance of the Cambridge Associates private equity and venture capital benchmarks in the first quarter of 2016, click here.
About the Indices
Cambridge Associates derives its Global ex U.S. Developed Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex U.S. private equity and venture capital funds. As of June 30, 2016, the database comprised 819 global ex U.S. developed markets private equity and venture capital funds formed from 1986 to 2015, with a value of about $248 billion. Ten years ago, as of June 30, 2006, the benchmark index included 435 global ex U.S. developed markets funds, whose value was roughly $108 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 June 30, 2016, the database comprised 588 emerging markets funds formed from 1986 to 2015, with a value of roughly $164 billion. Ten years ago, as of June 30, 2006, the index included 266 emerging markets funds whose value was $20 billion. The funds in this index invest primarily in Africa, emerging Asia, emerging Europe, Latin America & Caribbean, and the Middle East ex Israel.
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 1,100 global investors – primarily foundations and endowments, pensions and family offices – and delivers a range of services, including outsourced investment (OCIO) solutions, traditional advisory 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, 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.
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.