But Cambridge Associates US Venture Capital Index Shows That Funds Were Mostly Outperformed by Public Markets in All but the Longest Time Periods
Boston (October 15, 2018) – US venture capital managers struggled against a backdrop of healthy public markets and an improving economy in 2017, underperforming in the fourth quarter although still delivering a respectable double-digit return for the year, according to figures published by Cambridge Associates, the global investment firm.
The Cambridge Associates LLC US Venture Capital Index returned 2.8% in Q4 2017—down from 3.2% posted in Q3—as it achieved an overall return of 11.1% for the year. This left it trailing or merely competitive with the three comparable public market indexes over most time periods: the Russell 2000, the S&P 500 and the Nasdaq, which tracks tech stocks. Only over the 20-year and 25-year time periods did the index outperform those tracking the public markets.
The annual performance was driven by seven of the 10 meaningfully sized vintage years (those accounting for at least 5% of the overall index’s value) that posted returns above 12%. The best-performing vintage year—2013—saw a return of 5.8% in the fourth quarter and a return of 21.4% for the year. It was buoyed by significant write-ups in health care and IT, each with about $1.3 billion in valuation increases.
The annual performance was hit by weak returns in 2006-2008 vintage years. In 2008, the worst-performing vintage year, there was a return of -2.0% for the quarter and -0.8% for the year. It suffered from write-downs in health care totaling $246 million, although this was slightly offset by write-ups in consumer discretionary and IT.
These three sectors—health care, consumer discretionary and IT—continued to dominate the venture capital index. They accounted for almost 87% of its value at the close of 2017. Also, they attracted most of the investment—almost 90% of capital invested during fourth quarter went into companies in these sectors, which is slightly above the long-term trend. Health care and IT each garnered more than $1 billion in investments during the fourth quarter.
Although the US venture capital managers failed to match the performance of the public markets, they nevertheless enjoyed an active year, calling and distributing more capital than in 2016. Contributions from investors increased by 19% to $17.1 billion while distributions increased by 14% to $21.5 billion, making 2017 the sixth straight year when more capital was distributed than called. An uptick in the number and value of IPOs of venture-backed companies reflected another component of venture capital’s active year. According to the National Venture Capital Association and PitchBook, there were 58 venture-backed IPOs in 2017—a 41% increase over 2016. They were valued at close to $10 billion—a 236% increase over the previous year.
“The US Venture Capital Index had a respectable fourth quarter.” says Theresa Hajer, Managing Director and co-head of US Venture Capital Research at Cambridge Associates. “Keeping with historical trends, consumer discretionary, health care and IT were the largest sectors of the index and the drivers of returns during the year. Continued enthusiasm for the space continued to fuel cashflow into venture managers, and the volume of cash flows out of venture managers, as well as the IPO market, rebounded from a slow year prior.”
Cambridge Associates derives its US Venture Capital Index from the financial information contained in its proprietary database of 1,794 venture capital funds, with a value of $208.1 billion.
US Venture Capital Index Returns
Periods Ended December 31, 2017 • USD Terms • Percent (%)
|Qtr||1 Yr||3 Yr||5 Yr||10 Yr||15 Yr||20 Yr||25 Yr|
|CA US Venture Capital||2.8||11.1||8.0||15.3||9.0||9.5||22.9||28.0|
|Nasdaq Constructed Index* mPME||6.5||29.7||14.4||19.9||11.7||12.5||9.8||11.0|
|Russell 2000® mPME||3.3||14.6||9.8||14.7||9.1||11.4||8.8||9.7|
|S&P 500 mPME||6.6||21.8||11.2||16.2||9.0||10.1||7.9||9.4|
|Nasdaq Composite Index** AACR||6.3||28.2||13.4||18.0||10.0||11.6||7.7||9.7|
|Russell 2000® AACR||3.3||14.6||10.0||14.1||8.7||11.2||7.9||9.5|
|S&P 500 AACR||6.6||21.8||11.4||15.8||8.5||9.9||7.2||9.7|
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.
Some highlights of the US Venture Capital Index in Q4 2017 (and for the calendar year 2017):
- Three sectors—consumer discretionary, health care and IT—were the main drivers of performance in 2017: Consumer discretionary was largely driven by the 2005 vintage year’s $700 million in write-ups, as well as write-ups of $200 million or more in six vintage years: 2006, 2008–11, and 2014. Health care was driven by write-ups of more than $875 million in four vintage years (2004, 2010, and 2013–14). IT was driven by write-ups averaging almost $1.6 billon in five vintages years (2010 and 2012–15).
- Venture capital funds have distributed more capital than they have called in 23 of the 24 past quarters (a cash flow trend that the venture industry hasn’t experienced since the 1990s): The amount of called capital fell to $4.1 billion in the fourth quarter—a decrease of about $390 million, or 9%, from the previous quarter. By contrast, distributions rose 7% to $6.1 billion.
- Six vintage years accounted for 59% of all capital distributed in the fourth quarter: The years 2000, 2005–07, and 2010–11 returned more than $450 million to investors during the quarter. Distributions from these vintages averaged just over $600 million each.
For additional information on the performance of the Cambridge Associates US Private Equity benchmarks in the fourth quarter of 2017, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at +1 (212) 255-8386 or firstname.lastname@example.org.
About the Indexes
Cambridge Associates derives its US venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of December 31, 2017, the database included 1,794 US venture capital funds formed from 1981 to 2017, with a value of $208.1 billion. Ten years ago, as of December 31, 2007, the index included 1,257 funds whose value was $92.0 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 advisory services.
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.