Private Funds in Emerging Markets and Non-U.S. Developed Markets Underperformed Comparable Public Indices in Q3 2016
Boston, MA (April 11, 2017) – Private equity (PE) and venture capital (VC) funds based outside the U.S. performed much better in the third quarter of 2016 than the second, according to benchmark indices of the two asset classes from global investment firm Cambridge Associates.
The Cambridge Associates LLC Global ex U.S. Developed Markets PE/VC Index® returned 4.9%, measured in U.S. dollars, to investors in the third quarter of 2016, while the Cambridge Associates LLC Emerging Markets PE/VC Index® generated a 2.6% return. (See table below.) The two indices returned 1.3% and 0.7%, respectively, in Q2 2016.
The private investment benchmarks underperformed comparable public indices for the quarter, mainly the MSCI EAFE, which measures public equity performance in developed markets outside the U.S., and the MSCI Emerging Markets Index, which tracks public markets in emerging market economies, in Q3 2016. The MSCI EAFE returned 6.4%, while the MSCI Emerging Markets Index posted a stronger return of 9.2%.
“A somewhat stronger euro, coupled with distributions outpacing contributions nearly three to one, helped boost third-quarter returns for PE and VC in developed markets outside the U.S. from their second-quarter returns,” says Andrea Auerbach, Head of Global Private Investments at Cambridge Associates.
“Emerging market funds continue to mature. Distributions to investors from emerging market funds grew between the second and third quarters of 2016 even as contributions fell, showing that managers are becoming more adept at recouping capital. Funds of the 2011 vintage showed particularly strong performance in 2016’s third quarter” 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 843 private equity and venture capital funds in developed markets outside the U.S. and 606 private equity and venture capital funds in emerging markets, with a combined value of roughly $422 billion.
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.
A few highlights from the Global ex U.S. Developed Markets PE/VC Index in Q3 2016:
- Distributions to PE/VC Investors in Developed Markets Outside U.S. Outpaced Contributions to Managers in Q3 2016. Investors in the ex U.S. Developed Markets Index contributed $5.2 billion to PE/VC funds in Q3 2016, while distributions from managers to limited partners totaled $15.5 billion. Contributions decreased by 41% and distributions increased by 16% between Q2 and Q3 2016.
- Materials Companies Performed Well in Q3 2016. All of the sectors that represented at least 5% of the ex US Developed Markets Index in Q3 2016 earned positive returns for the quarter. Among those sectors, consumer discretionary earned the lowest return – 4.7% – and materials earned the highest – 9.4%. Four sectors – consumer discretionary, health care, industrials and financials – attracted nearly 70% of the capital invested during the quarter.
- Non-U.S. Developed Market PE/VC Funds Raised in 2007 Were Best Performers in Q3 2016. All of the vintage years that represented at least 5% of the ex U.S. Developed Markets Index posted a positive return in Q3 2016. Vintage 2007 funds performed best with a 7.1% return, driven by increased valuations at health care, consumer discretionary and information technology firms. Funds raised in 2006 generated the lowest return for the quarter – 3.2%.
- Swedish Companies Posted Highest Returns in Developed Markets Outside the U.S. in Q3 2016. Companies based in Sweden returned 7.4% to investors in the third quarter of 2016. Swedish consumer discretionary and industrial companies drove the performance. Companies based in the United Kingdom posted the lowest return – 3.7% – out of the countries that made up at least 5% of the ex U.S. Developed Markets Index.
Some highlights from the Emerging Markets PE/VC Index in Q3 2016:
- Distributions to Emerging Markets PE/VC Investors Outpaced Contributions to Fund Managers in Q3 2016. During the third quarter of 2016, fund managers in the Emerging Markets Index distributed $5.3 billion to investors, an increase of 45% from Q2 2016. Contributions to funds from investors totaled $3.1 billion in Q3 2016, a drop of 20% from the second quarter.
- All Sectors in the Emerging Markets PE/VC Index Posted Positive Returns in Q3 2016. Six sectors in the Emerging Markets Index represented at least 5% of the index, and all of them generated a positive return in Q3 2016. Financials posted the strongest return – 6.3% – and industrial companies delivered the weakest – 2.0%.
- Emerging Markets PE/VC Funds Raised in 2011 Delivered the Strongest Returns in Q3 2016. In the third quarter of 2016, 2011 vintage funds in the Emerging Markets Index returned 4.3% to investors, largely due to increased valuations of consumer discretionary, financial and health care companies. Funds raised in 2012 posted the lowest return in Q3 2016, 0.2%.
- Chinese and Indian Companies Continued to Dominate PE and VC in Emerging Markets. Chinese and Indian companies represented 46.8% and 8.2%, respectively, of the Emerging Markets Index in Q3 2016. Chinese companies returned 2.7% for the quarter and Indian firms posted a 7.6% return in Q3 2016. Companies based in Japan, which represented under 3% of the Emerging Markets Index, had the largest quarterly return of any country, 13.7%.
For additional details on the performance of the Cambridge Associates global private equity and venture capital benchmarks in the third quarter of 2016, please 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 September 30, 2016, the database comprised 843 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 September 30, 2006, the benchmark index included 455 global ex U.S. developed markets funds, whose value was roughly $111 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 U.S. private equity and venture capital funds. As of September 30, 2016, the database comprised 606 emerging markets funds formed from 1986 to 2015, with a value of $170 billion. Ten years ago, as of September 30, 2006, the benchmark index included 273 emerging markets funds, whose value was $22 billion. The funds in this index invest primarily in Africa, emerging Asia, emerging Europe, Latin America & Caribbean, and the Middle East ex Israel.
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.
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.
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.