New Data from Cambridge Associates Show Venture Funds Rallied After a Poor Second Quarter—But Only Investors With At Least A 20-Year Horizon Outperformed Public Markets
Boston (April 18, 2018) – The performance of venture capital managers ticked up in the third quarter of 2017, emerging from the second quarter, when a slow exit environment and mixed IPO performance dented returns, according to figures published today by Cambridge Associates, the global investment firm.
The Cambridge Associates LLC US Venture Capital Index returned 3.2% in Q3 2017—up from the 1.4% posted in Q2. But, even with this strengthening performance, the US Venture Capital Index underperformed the Russell 2000 and S&P 500, as well as a third comparable public market index: the Nasdaq, which tracks tech stocks and returned 6.1% for the quarter. Over time periods of 20 years or more the index outperformed those tracking the public markets.
The key to the boost in the third quarter was the fact that nine of the ten “meaningfully sized” vintage years—those funds that each represented at least 5% of the index’s value—achieved positive results. Four of the large vintages—2010, 2011, 2013, and 2014—saw returns exceed 5%. Only one vintage—2008—posted a negative return: -0.9%. By contrast, in the second quarter, only two of the meaningfully sized vintages had posted returns greater than 3%.
Another reason for the stronger performance was that two of the three largest sectors in the Cambridge Associates US Venture Capital Index achieved strongly positive returns in the quarter. Health care, which accounted for 25% of the index, extended its positive run with a third consecutive quarter of delivering the best performance, posting a 6% return. Meanwhile, consumer discretionary, accounting for 8% of the index, recorded a return of 5.7%.
But simply being in a particular sector was not a guarantee of success—or failure. The IT sector, which accounted for over half the value of the index, posted a 1.9% return. Yet, IT companies were a primary driver of improved performance for the best performing vintage, 2011, whose funds recorded an 8.1% return, and the largest vintage, 2014, whose funds recorded a 5.1% return. By contrast, although the 2014 group of funds saw significant write-ups in health care, the 2008 group of funds, which turned in the worst performance for the quarter, actually suffered because of their selection of health care companies.
“It is encouraging to see that venture capital funds enjoyed something of a recovery in the third quarter of 2017,” says Theresa Hajer, Managing Director and co-head of US Venture Capital Research at Cambridge Associates. “Technology is transforming a broad swath of industries, and venture capital funds provide direct exposure to innovative and emerging technology companies. But it remains the case that these funds are for long-term investors who can afford to be patient. For those who have a long time horizon, the rewards can be significant. Hence our continued focus on potential VC investments, and on informed manager selection.”
Cambridge Associates derives its US Venture Capital Index from the financial information contained in its proprietary database of more than 1,700 US venture capital funds, with a value of $203 billion.
US Venture Capital 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 Venture Capital||3.2||8.1||7.9||10.8||14.8||9.1||8.8||22.3||28.2|
|Nasdaq Constructed Index* mPME||6.1||21.7||23.6||14.2||17.5||10.9||12.8||9.3||11.4|
|Russell 2000® mPME||5.7||10.9||20.8||12.2||14.3||8.3||11.5||8.6||10.1|
|S&P 500 mPME||4.5||14.2||18.6||10.7||14.5||8.1||10.1||7.7||9.3|
|Nasdaq Composite Index** AACR||5.8||20.7||22.3||13.1||15.8||9.2||12.1||7.0||10.1|
|Russell 2000® AACR||5.7||10.9||20.7||12.2||13.8||7.8||11.4||7.5||10.0|
|S&P 500 AACR||4.5||14.2||18.6||10.8||14.2||7.4||10.0||7.0||9.6|
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 from the US Venture Capital Index in Q3 2017:
- There was a slight reduction in capital calls: Some $4.3 billion was called from investors during the third quarter—a 2.6% decrease from the second quarter. This was, however, the seventh highest capital call over the past five years (20 quarters). Funds formed from 2014 to 2016 were responsible for 81% ($3.5 billion) of the total capital called during the quarter.
- There was a significant increase in distributions: Venture funds distributed $5.7 billion—a 25.8% increase from the second quarter. The amount distributed in the second quarter had been among the lowest quarterly outputs since 2012. So the third quarter distributions were much more in line with the five-year average.
- The lion’s share of the investments were made in four sectors: IT, health care, financials, and consumer discretionary companies received the biggest investments. Compared with long-term norms, 3.3% more capital was invested in financials while 2.6% less was invested in consumer discretionary. Health care and IT were about in line with their historical norms.
For additional information on the performance of the Cambridge Associates US Venture Capital benchmarks in the third quarter of 2017, please contact Katarina Wenk-Bodenmiller of Sommerfield Communications at +1 (212) 255-8386 or email@example.com, or click here.
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 September 30, 2017, the database comprised 1,762 US venture capital funds formed from 1981 to 2017, with a value of $203 billion. Ten years ago, as of September 30, 2007, the index included 1,232 funds whose value was $89 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.