Cambridge Associates’ US Private Equity Index Outperformed the Russell 2000 Index in the First Three Quarters of 2017
Boston (April 18, 2018) – Private equity managers in the US delivered strong performance in the third quarter of 2017, as they beat or matched their performance in the first two quarters, according to new data published by Cambridge Associates, the global investment firm. Reflecting the continued increase in private equity funds’ dry powder as well as typically higher second half investment activity, managers collectively made a significant increase in capital calls.
The Cambridge Associates LLC US Private Equity Index returned 3.9% in the third quarter of 2017—slightly higher than the 3.6% achieved in the second quarter. As a result, the year-to-date performance was 11.7%, which was better than the YTD performance of the Russell 2000 Index, which tracks performance of public small companies and returned 10.9%.
In an indication of a continued buoyant market for private equity managers, they called $32.6bn in the third quarter—an increase of 22.1% over the second quarter. By contrast, they distributed $36.5bn—an 11.2% quarter-over-quarter decrease. Seven vintage years (2007 and 2011–16) called more than $1.0 billion each (ranging from $1.0 billion to $10.0 billion) and accounted for virtually all the capital called in the quarter.
Even though the performance of the private equity index was positive, it still trailed the S&P 500, which tracks large cap companies and returned 4.5% for the quarter and 14.3% YTD. Indeed, over every timeframe from one year to five years, the private equity index lagged the Russell 2000 and the S&P 500. However, across market cycles, defined here as periods of 10 years or more, the private equity index has historically outperformed public markets.
Notably, the post-global financial crisis funds (raised since 2008) appear to be keeping pace, with quarterly returns that averaged 4.5% in the most recent period and averaged 16.5% over the last year. This contrasts with the most sizable and active pre-global financial crisis vintages of 2004-2008, which averaged 2.4% for the quarter and 13.5% over the last year.
Said Keirsten Lawton, Managing Director and co-head of US Private Equity Research at Cambridge Associates. “This has been a strong period for equities, whether private or public. In buoyant markets, private equity may experience periods of relative underperformance but it still represents one of the best asset classes for investors. Additionally, private equity tends to be more conservatively marked such that we typically see outperformance in periods where public equity markets become choppy.”
She added: “From a cashflow perspective, we expect to see continued healthy activity for both capital calls and distributions. Dry powder, capital committed to private equity but not yet invested, is likely to remain at a high level off the back of 2017’s healthy fundraising activity, while the existing value of company investments, by private equity funds is at a record high.”
Cambridge Associates derives its US Private Equity Index from the financial information contained in its proprietary database of 1,400 US private equity funds, with a value of roughly $704 billion.
US Private Equity Index Returns
Periods Ended September 30, 2017 • USD Terms • Percent (%)
|Qtr||YTD||1 Yr||3 Yr||5 Yr||10 Yr||15 Yr||20 Yr||25 Yr|
|CA US Private Equity||3.9||11.7||16.9||10.2||13.6||9.7||13.6||12.2||13.5|
|Russell 2000® mPME||5.7||10.9||20.8||12.2||14.5||8.9||11.2||8.7||9.6|
|S&P 500 mPME||4.5||14.3||18.6||10.7||14.6||8.5||10.0||7.9||8.8|
Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s and Thomson Reuters Datastream.
Notes: Private indexes are pooled horizon internal rates of return, net of fees, expenses and carried interest. Because the US Private Equity and Venture Capital indexes are capitalization 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 (mPME). The CA Modified Public Market Equivalent replicates 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 mPME cash flows and public index returns.
Some highlights from the US Private Equity Index in Q3 2017:
- Returns were more widely dispersed than in the second quarter: Among the “meaningfully sized vintages”—that is, funds that each represented at least 5% of the index’s value—returns ranged from 2.4% for the 2006 vintage to 6.4% for the 2012 vintage.
- Distributions decreased during the quarter, but were still significant: Eleven vintages (2004–14) each distributed at least $1.2 billion. Of those distributing the most capital, four vintages, 2006–08 and 2011, stand out because they all distributed more than $3.9 billion and represented 57% of the total distributed during the quarter.
- All seven large sector components earned positive returns: Returns ranged from 1.9% (consumer discretionary) to 7.8% (health care). Four of the seven sectors—health care, industrials, materials, and IT—rose more than 6.4%.
- Five sectors—IT, consumer discretionary, energy, health care, and industrials— attracted 90% of the capital invested during the quarter. Driving the difference between the quarter and the long-term norm were the high allocations to IT, energy, and health care and the lower than historical allocation to industrials and financials, the latter of which saw inflows at less than half its long-term pace.
For additional information on the performance of the Cambridge Associates US Private Equity benchmarks in the third quarter of 2017, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at +1 (212) 255-8386 or firstname.lastname@example.org, or click here.
About the Indexes
Cambridge Associates derives its US private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of September 30, 2017, the database comprised 1,421 US buyouts, private equity energy, growth equity, and subordinated capital funds formed from 1986 to 2017, with a value of $704 billion. Ten years ago, as of September 30, 2007, the index included 825 funds whose value was $330 billion.
The pooled returns represent the net end-to-end 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 a carried interest.
About Cambridge Associates
Cambridge Associates is a leading global investment firm. We aim to help endowments & foundations, pension plans, and private clients implement and manage custom investment portfolios that generate outperformance so they can maximize their impact on the world. Working alongside its early clients, among them leading university endowments, the firm pioneered the strategy of high-equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for institutional investors. Cambridge Associates delivers a range of services, including outsourced CIO, non-discretionary portfolio management, and investment consulting.
Cambridge Associates maintains offices in Boston; Arlington, VA; Beijing; Dallas; London; Menlo Park, CA; New York; San Francisco; Singapore; Sydney; and Toronto. Cambridge Associates consists of five global investment consulting affiliates that are all under common ownership and control. For more information, please visit www.cambridgeassociates.com.
The information presented 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 research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Some of the data contained herein or on which the research is based is current public information that CA considers reliable, but CA does not represent it as accurate or complete, and it should not be relied on as such. Nothing contained in this report should be construed as the provision of tax or legal advice. Past performance is not indicative of future performance. Broad-based securities indexes 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. Any information or opinions provided in this report are as of the date of the report, and CA is under no obligation to update the information or communicate that any updates have been made. Information contained herein may have been provided by third parties, including investment firms providing information on returns and assets under management, and may not have been independently verified.