Boston (January 8, 2018) – Performance from private equity managers in the US was strong in the second quarter of 2017, while US-based venture capital performance was more middling, according to the benchmark indexes of the alternative asset classes from global investment firm Cambridge Associates.
The Cambridge Associates LLC US Private Equity Index returned 3.6% in the second quarter of 2017, essentially matching its first quarter performance. In Q2 2017, the US Private Equity Index outperformed both the Russell 2000 Index, which tracks performance of small cap companies and returned 2.5%, and the S&P 500, which tracks large cap companies and returned 3.1%.
Meanwhile, the Cambridge Associates LLC US Venture Capital Index returned 1.4% in Q2 2017, a drop from a stronger first quarter. The US Venture Capital Index underperformed the Russell 2000 and S&P 500 in Q2, as well as a third comparable public market index: the Nasdaq, which tracks tech stocks and returned 4.2% for the quarter.
“The one sector in the private equity index that underperformed during the second quarter was energy. But, overall, in 2017 private equity in the US is performing strongly and in line with comparable public market indexes,” says Keirsten Lawton, Managing Director and co-head of US Private Equity Research at Cambridge Associates.
“Venture capital in the US has been struggling somewhat relative to public markets in recent years; a slow exit environment in the first half of 2017 and mixed IPO performance in part muted returns. Despite the cyclicality, the return figures show that long-term investors can add considerable value with the asset class, if they have a long time horizon,” says Theresa Hajer, Managing Director and co-head of US Venture Capital Research at Cambridge Associates.
Cambridge Associates derives its US Private Equity and Venture Capital Indexes from the financial information contained in its proprietary database of 1,400 US private equity funds and 1,746 US venture capital funds, with a combined value of roughly $875 billion.
Table 1. US Private Equity and Venture Capital Index Returns (IRR)
Periods Ended June 30, 2017 • USD Terms • Percent (%)
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.
* Constructed Index: Data from 1/1/1986 to 10/31/2003 represented by Nasdaq Price Index. Data from 11/1/2003 to present represented by Nasdaq Composite.
**Capital change only.
A few highlights from the US Private Equity Index in Q2 2017:
- US PE investors received fifth highest quarterly distribution amount ever in Q2 2017. During Q2 2017, distributions to investors in the US Private Equity Index equaled $40.1 billion, a 23.2% increase from Q1 and the fifth highest quarterly distribution ever. Fund managers in the Index called $24.5 billion, up 5.4% from Q1.
- Only sector in US PE Index with negative returns in Q2 2017 was energy. Of the seven sectors each worth 5% of the US Private Equity Index in Q2 2017, materials companies posted the strongest return: 7.3%. Energy investments were the only sector that went down in value, with a -1.1% return.
- Not much variance in Q2 2017 between returns from funds of different vintage in US PE Index.Returns among the “meaningfully sized” vintages in the US Private Equity Index – that is, funds that each represented at least 5% of the index’s value – were within a fairly tight band, ranging from 2.6% for funds raised in 2012 to 4.0% for funds raised in 2014.
Selected takeaways from the US Venture Capital Index in Q1 2017:
- Distributions to US VC investors were higher than contributions in Q2 2017. Distributions to investors in the US Venture Capital Index totaled $4.5 billion in Q2 2017, a decrease of 12.9% from the previous quarter. Capital called by fund managers in the Index rose 13.8% from Q1, to $4.2 billion.
- All major sectors in US VC Index posted positive returns in Q2 2017. Among the three industry sectors each worth at least 5% of the US Venture Capital Index in Q2 2017, the highest return for the quarter was from health care investments, which posted a 1.9% return. Information technology investments and consumer discretionary investments rose in value by 1.5% and 1.4%, respectively.
- US VC Index funds raised in 2008 and 2010 were only ones with negative returns in Q2 2017, among major vintages in the Index. Returns in Q2 2017 for funds raised in 2008 and 2010 were slightly negative, at -0.4%. The top-performing vintage in the quarter was 2013, which posted a 3.9% return.
For additional information on the performance of the Cambridge Associates US Private Equity and Venture Capital benchmarks in the second quarter of 2017, please 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 June 30, 2017, the database comprised 1,400 US buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2017, with a value of $678 billion. Ten years ago, as of June 30, 2007, the index included 798 funds whose value was $312 billion.
Cambridge Associates derives its US venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of June 30, 2017 the database comprised 1,746 US venture capital funds formed from 1981 to 2017, with a value of roughly $197 billion. Ten years ago, as of June 30, 2007, the index included 1,214 funds whose value was $86 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.