SOURCE: Cambridge Associates

Cambridge Associates

September 15, 2015 10:00 ET

Private Equity Investments in Emerging Markets Outperformed Those in ex U.S. Developed Markets in Last Year's Final Quarter and for 2014, According to Cambridge Associates

Both Classes of Private Investments Bested Their Public Market Counterparts for Q4, the Year, and All Trailing Time Periods in Both CA Benchmarks

BOSTON, MA--(Marketwired - Sep 15, 2015) - Investments in private equity and venture capital funds in both ex U.S. developed and emerging markets ended the final quarter of 2014 with positive returns, though the former just barely, as measured in U.S. dollars. A weakened euro tamped down dollar-based returns over both the quarter and the year for investments in ex U.S. developed markets. Emerging market investments fared better, posting strong returns for both the quarter and the year. Both alternative asset classes outpaced comparable investments in the public equities markets, according to global institutional advisor Cambridge Associates LLC (CA).

The Cambridge Associates LLC Global ex U.S. Developed Markets Private Equity and Venture Capital Index was essentially flat in Q4, ending the quarter up 0.1%. For the year ending December 31, 2014, the index rose 3.5%. For comparison in terms of U.S. dollar-based returns, the MSCI EAFE fell 3.6% for the quarter and 4.9% for the year. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index increased 4.5% for the quarter and 14.3% for the year. For comparison, the MSCI Emerging Markets index dropped 4.4% and 1.8% for the quarter and year, respectively.

Returns for the Global ex US Developed and Emerging Markets PE/VC Indexes vs Public Counterparts (%)

    Qtr   1 Yr   3 Yr   5 Yr   10 Yr   15 Yr   20 Yr
CA Global ex US Dev Mkts PE/VC ($)   0.1   3.5   11.8   10.8   11.7   12.6   13.6
CA Global ex US Dev Mkts PE/VC (EUR)   4.5   17.5   13.9   14.3   13.5   11.6   13.2
CA Emerging Markets PE/VC ($)   4.5   14.3   12.9   12.2   12.4   9.8   9.6
MSCI EAFE ($)   -3.6   -4.9   11.1   5.3   4.4   2.5   5.0
MSCI EAFE (EUR)   0.7   8.3   13.7   9.0   5.7   1.3   5.2
MSCI Emerging Markets ($)   -4.4   -1.8   4.4   2.1   8.8   7.4   6.0
S&P 500 ($)   4.9   13.7   20.4   15.5   7.7   4.2   9.9

Sources: Cambridge Associates LLC, MSCI Inc., Standard & Poor's, and Thomson Reuters Datastream. MSCI data provided "as is" without any express or implied warranties.

The returns of both Cambridge Associates indexes were helped by strong exit environments throughout 2014. In Europe, PE-backed initial public offerings (IPOs) hit a historic high, while in Asia both mergers and acquisitions (M&A) activity and IPOs were at historic or near-historic highs.

Highlights from the CA Global ex U.S. Developed Markets Private Equity and Venture Capital Index

Distributions to Limited Partners Hit an All-Time Annual High in 2014

"Fund managers in the developed markets index called and distributed less capital in Q4 than in the prior quarter. Nevertheless, Q4 marked the second highest level of capital distributions since the inception of the index: $19.6 billion, which was only about a two percent drop from the record in Q3. Investors in funds launched in 2004 through 2008 received more than 86% of the total. Fund managers called $7.2 billion from their investors, about 39% less than the previous quarter," said Andrea Auerbach, Managing Director and Head of Global Private Investment Research at Cambridge Associates.

For the year, capital contributions and distributions were up 22.8% and 18.1%, respectively, from 2013. Distributions hit a record high of $64 billion.

Key Sectors of the Index all Posted Positive Returns for the Quarter and Year

All seven significantly-sized sectors in the developed markets index earned positive returns in Q4. Health care led the way with a 3.3% increase, followed by consumer at 2.1%. The lowest quarterly return among the top sectors was software's 0.1% rise, though the marginal increases of less than 1.0% for media and manufacturing were not far behind.

Although media had the second lowest increase for the quarter, it was far and away the top earner for the year, generating a 31.2% return. Health care was a distant second at 9.0%. Financial services rose just 1.4% for the year, making it the poorest annual performer among the top sectors. Consumer, the perennial largest sector by weight in the index, returned 2.1% for the quarter and 7.2% for the year. Consumer companies represented almost one-quarter of the index's value at year-end.

Returns across the Index's Major Vintage Years was Mixed

Six vintages in the index -- 2005 through 2008 and 2011-2012 -- represented at least 5% of the index's value; together, they represented about 81%. Quarterly returns among them ranged from a low of -1.2% for funds launched in 2011 to 1.1% for those launched in 2006. The latter's performance was aided by write-ups in health care and materials, though these gains were partially offset by losses in energy and consumer. For the year, returns ranged from -0.9% for the 2005 funds to 7.6% for those raised in 2008. Consumer, financial services, information technology (IT), and electronics were the key drivers for the 2008 vintage's annual performance.

Portfolio Companies Based in the U.S. Had the Highest Returns for the Quarter and Year among the Major Geographic Regions Represented in the Index; German Companies Struggled

Companies based in five regions represented 5% or more of the index's total value: France, Germany, Sweden, the United Kingdom, and the United States. U.S.-based companies generated the highest returns for the quarter and year, 5.7% and 15.5%, respectively. Companies based in the UK did second best for the quarter, rising 2.3%, while those based in France had the second strongest annual performance, earning an 11.6% return.

Germany had the lowest return among the top five regions for both periods. Companies there fell 5.0% in Q4 and eked out only a 0.3% gain for the year.

Highlights from the CA Emerging Markets Private Equity and Venture Capital Index

Annual Cash Flows Hit Record Levels

"Limited partners (LPs) of funds in the emerging markets index enjoyed the third largest quarterly distribution in the index's history, as well as, for the whole of 2014, the largest ever annual distribution: $5.8 billion and $21.2 billion, respectively. Over the same periods, LPs contributed $4.8 billion and $18.3 billion -- the latter also an all-time high for the index. Annual contributions and distributions were up 19% and 37%, respectively, from 2013," said Vish Ramaswami, Managing Director at Cambridge Associates.

Electronics Posted Massive Returns for the Quarter and Year

Six sectors in the emerging markets index represented at least 5% of its value. All but two, health care and manufacturing, had positive returns for the quarter, while all six rose over the course of the year.

Though it was the smallest of the six large sectors by weight, representing just 8.5% of the index, electronics was by leaps and bounds the leading performer of the group in both periods. The sector rose 102.2% for the quarter and 120.4% for the year. Financial services earned the second highest quarterly return, 10.6%. IT had second-place honors for the year, rising 30.6%. Manufacturing generated the lowest returns for both quarter and year, earning -3.4% and 2.9%, respectively, over those periods. Health care fell slightly in Q4, dropping three-tenths of a percent, but the sector achieving double-digit growth for the year, rising 11.8%.

Seven Largest Vintages Had Positive Returns for the Year

Of the seven vintage years from 2005 to 2011, inclusive, only the funds raised in 2006 turned in a negative performance in Q4, when they fell 2.5%. The best performing vintage for the quarter was 2008, whose funds gained 20.2%. For the year, the 2008 vintage earned 28.5%, which placed it second only to the 30.6% jump posted by funds raised in 2011. These two vintages, 2008 and 2011, were helped by significant write-ups in the value of their electronics and IT holdings, respectively. The 2008 vintage was the second largest by weight in the index, representing almost 14% of its value. The largest by weight was the 2007 vintage, which represented more than a quarter of the index's value. Its funds rose 2.4% and 13.2% over the quarter and year, respectively.

Chinese Companies Made the Greatest Earnings Gains among the Key Regions for the Quarter and Year

The emerging markets index was highly concentrated geographically at the end of 2014, with only two countries representing more than 5% of the index's value: China represented 43.0% of the index; India, 9.2%. Three other countries -- South Korea, Singapore, and Australia -- each represented at least 2.9% of the index.

Companies in China were the top performers of the major regions, earning quarterly and annual returns of 17.2% and 33.4%, respectively. Over the same periods, companies based in India earned 3.8% and 29.9%. Fund managers continued to send the bulk of their investment capital to China, with companies based there receiving almost five times as much capital as the next closest country in Q4.

For more detailed information please see the Cambridge Associates commentary on the Q3 benchmarks at http://www.cambridgeassociates.com/our-insights/research/global-ex-us-pevc-benchmark-commentary-5/.

About the Indices

Cambridge Associates derives its Global ex US Developed Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex US private equity and venture capital funds. As of December 31, 2014, the database comprised 744 global ex US developed markets private equity and venture capital funds formed from 1986 to 2014 with a value of about $262 billion. Ten years ago, as of December 31, 2004, the benchmark index included 348 global ex US developed markets funds, whose value was roughly $78 billion.

Cambridge Associates derives its Emerging Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex US private equity and venture capital funds. As of December 31, 2014, the database comprised 552 emerging markets funds formed from 1986 to 2014 with a value of about $149 billion. Ten years ago, as of December 31, 2004, the benchmark index included 205 emerging markets funds, whose value was more than $15 billion.

About Cambridge Associates
Founded in 1973, Cambridge Associates is a provider of independent investment advice and research to institutional investors and private clients worldwide. Today the firm serves over 1,000 global investors and delivers a range of services, including investment advisory, outsourced investment solutions, research and tools (Research Navigator and Benchmark Calculator), and performance monitoring, across asset classes. The firm compiles the performance results for over 5,600 private partnerships and their more than 70,000 portfolio company investments to publish proprietary private investments benchmarks. Cambridge Associates has more than 1,100 employees serving its client base globally and maintains offices in Arlington, VA; Boston; Dallas; Menlo Park, CA; London; 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.

Cambridge Associates has been selected to provide data and to develop and maintain customized industry benchmarks for a number of prominent industry associations, including the Institutional Limited Partners Association (ILPA), Australian Private Equity & Venture Capital Association Limited (AVCAL); the African Venture Capital Association (AVCA); the Hong Kong Venture Capital and Private Equity Association (HKVCA); the Indian Private Equity and Venture Capital Association (IVCA); the New Zealand Private Equity & Venture Capital Association Inc. (NZVCA); the Asia Pacific Real Estate Association (APREA); and the National Venture Capital Association (NVCA). Cambridge also provides data and analysis to the Emerging Markets Private Equity Association (EMPEA).

Inquiries about these indices should be addressed to: Frank Lentini at Sommerfield Communications, 55 Broad Street, 20th Floor, New York, NY 10004; 212.255.8386; (fax) 212.255.8459; email eric@sommerfield.com.

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