SOURCE: Cambridge Associates

Cambridge Associates

August 04, 2015 08:45 ET

Private Equity and Venture Capital Earned Double-Digit Returns for 2014, With VC Outperforming the Public Markets for Both Q4 and the Year, According to Cambridge Associates

Annual Distributions to LPs in the PE Index Broke Last Year's Record to Set an All-Time High for the Benchmark

BOSTON, MA--(Marketwired - Aug 4, 2015) - US private equity and venture capital funds finished the final quarter of 2014 with positive returns, though in the case of PE just barely, due primarily to poorly performing investments in energy companies. VC investments did significantly better for the period, beating out not only PE funds, but public equities as well. While neither private asset class matched its annual performance in 2013, both posted double-digit returns for 2014, though only VC funds bettered the public markets, according to institutional investment advisor Cambridge Associates.

The Cambridge Associates LLC US Private Equity Index® rose 0.8% and 11.2% for the quarter and year ending December 31, 2014. Cambridge Associates LLC US Venture Capital Index® increased 9.9% and 21.5%, respectively, over the same periods. For comparison, for the quarter and year the S&P 500 returned 4.9% and 13.7%. The annual returns of both Cambridge benchmarks were helped by the strong performances of companies in several large sectors, especially health care in the PE index and software in the VC index.

US Private Equity and Venture Capital Index Returns (%)
Periods Ending Dec. 31, 2014

    Qtr   1 Yr   3 Yr   5 Yr   10 Yr   15 Yr   20 Yr   25 Yr
CA US Private Equity   0.8   11.2   15.6   15.8   12.9   10.9   13.5   13.5
CA US Venture Capital   9.9   21.5   18.0   16.1   10.3   4.8   35.4   22.1
Nasdaq Composite*   5.4   13.4   22.1   15.9   8.1   1.0   9.6   9.8
Russell 2000®   9.7   4.9   19.2   15.6   7.8   7.4   9.6   9.8
S&P 500   4.9   13.7   20.4   15.5   7.7   4.2   9.9   9.6

Sources: Cambridge Associates LLC, Dow Jones & Company, Inc., Frank Russell Company, Standard & Poor's, and Thomson Datastream.
* Capital changes only.

Of the 24 quarters that have passed since the depths of the Great Recession in 2008 to the end of 2014, the PE index has generated positive returns in all but three, and the VC index in all but two.

Private Equity Benchmark

Six of the Seven Largest Sectors in the PE Index Earned Positive Returns in Q4; Energy Dragged Down Returns

At the end of Q4, seven sectors in the PE index were meaningfully sized (i.e. represented 5% or more of the index), and all but one posted gains for the period. Returns among them ranged from a high of 7.6% for software to a low of -14.1% for energy. Energy, the second largest weighted sector in the benchmark behind consumer, was the principal cause of the index's relatively weak quarterly performance.

Energy was also the worst-performing sector of the year and the only major sector with a negative return for 2014, dropping 2.4%. On the other end of the spectrum, three of the major sectors had annual returns topping 20%. Health care led the list with a 29.2% gain, followed by software at 24.7% and information technology (IT) at 24.3%.

Annual Capital Distributions Highest in the History of the PE Benchmark

On an annual basis distributions were at an all-time high, with fund managers returning $153.5 billion to their LPs. Capital calls were also up from the prior year, as LPs contributed $84.9 billion to their investment funds.

"A solid market for PE-backed initial public offerings (IPOs) and mergers and acquisitions (M&A) helped make 2014 a very good year for investors in funds tracked by the private equity index. The year also marked the third in a row in which more than $100 billion was returned to investors in the benchmark," said Keirsten Lawton, co-head of US Private Equity Research.

For the quarter, fund managers called less capital from their limited partners (LPs), and returned more, than in the prior quarter: $19.5 billion in Q4 versus $40.8 billion in Q3. Although distributions were quarter over quarter, they were still at the third highest level in the benchmark's 29-year history. Q4 marked the 12th consecutive quarter in which distributions outstripped contributions -- another benchmark record.

All of the Largest Vintage Years in the PE Index Posted Double-digit Returns in 2014; for Q4, the Results were Lower and Mixed

At the end of 2014 nearly 80% of the benchmark's value was represented by just six vintage years, 2005-08 and 2011-12. Among the six, returns for the final quarter ranged from a high of 2.1% for the 2005 funds to a low of -0.9% for funds raised in 2008.

The 2007 vintage, by far the largest group of funds in the index and representing more than a quarter of its total value, rose just 0.8% in Q4. For the year, the 2007 funds gained 12.5% and all of the other five largest vintages had returns greater than 10%. The main driver of the 2007 vintage's performance for the year was higher valuations on investments in health care, though write-ups in other sectors, including consumer, also contributed.

Venture Capital Benchmark

Software Easily Led the Quarter and Year among the Largest Sectors, but all showed very Strong Growth

The end of 2014 saw a very concentrated venture capital benchmark with only three meaningfully-sized sectors -- health care, IT, and software. All three had double-digit growth in the quarter and the year. Software, the smallest of the three large sectors, dominated in terms of growth over both periods, posting a 20.3% return for the quarter and an astounding 52.4% gain for the year.

IT, the largest sector in the index by weight, had the lowest quarterly and annual returns among the three: 10.9% and 22.1%, respectively. Health care companies earned 13.6% and 33.3% for the quarter and year.

Calls and Distributions in 2014 Outstripped Prior Year

Fund managers in the VC index called almost $4.0 billion from their LPs in the quarter, an increase of just over 13% from Q3. During the same period they distributed more than twice that amount, $8.1 billion, which was almost 21% more than the final quarter of 2013.

"Overall the VC index had another strong year of performance. Total distributions in 2014 hit their highest annual level since 2000. Further, limited partners have received more distributions than they paid into funds for 12 straight quarters. This venture outperformance has renewed investor interest in the space and illustrates the venture market's cyclicality," said Theresa Sorrentino Hajer, managing director, Private Growth Research.

All Nine Significantly-sized Vintages Booked Positive Returns for the Quarter and Year

No single vintage dominated the VC index by weight in 2014. Of the nine that represented at least 5.0% of the index's value, however, the 2010 vintage was far and away the growth leader, returning 27.6% for the quarter and a breathtaking 61.6% for the year. The primary contributors to the 2010 vintage's performance were significant write-ups in IT and software.

Funds raised in 2011 were the second best performers for the quarter and year, gaining 13.6% and 49.5%, respectively. The once dominant (by weight) 2000 vintage, which at its peak in 2005 represented more than 40% of the benchmark's value, now comprises just 6.0% of the index. It gained 4.4% and 6.8% for the quarter and year.

For more details on the Q4 and 2014 performance of the Cambridge Associates US private equity and venture capital benchmarks, go to http://www.cambridgeassociates.com/our-insights/research/us-pe%e2%80%8avc-benchmark-commentary/.

About the Indices
Cambridge Associates derives its U.S. private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of December 31, 2014, the database comprised of 1,199 U.S. buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2014, with a value of nearly $625.1 billion. Ten years ago, as of December 31, 2004, the index included 575 funds whose value was roughly $170.5 billion.

Cambridge Associates derives its U.S. venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of December 31, 2014, the database comprised 1,569 U.S. venture capital funds formed from 1981 to 2014, with a value of roughly $181.6 billion. Ten years ago, as of December 31, 2004, the index included 1,037 funds whose value was about $57.6 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 nearly 1,000 global investors and delivers a range of services, including investment consulting, outsourced investment solutions, research and tools (Research Navigatorsm and Benchmark Calculator), and performance monitoring, across asset classes. The firm compiles the performance results for more than 5,600 private partnerships and their nearly 70,000 portfolio company investments to publish its proprietary private investments benchmarks, of which the Cambridge Associates LLC U.S. Venture Capital Index® and Cambridge Associates LLC U.S. Private Equity Index® are widely considered to be among the standard benchmark statistics for these asset classes. 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 African Private Equity and Venture Capital Association (AVCA); the Asia Pacific Real Estate Association (APREA); Australian Private Equity & Venture Capital Association Limited (AVCAL); Canada's Venture Capital and Private Equity Association (CVCA); the Hong Kong Venture Capital and Private Equity Association (HKVCA); the Indian Private Equity and Venture Capital Association (IVCA); Institutional Limited Partners Association (ILPA); the Latin American Private Equity and Venture Capital Association (LAVCA); the National Venture Capital Association (NVCA); and the New Zealand Private Equity & Venture Capital Association Inc. (NZVCA). Cambridge Associates also provides data and analysis to the Emerging Markets Private Equity Association (EMPEA).

Both the Cambridge Associates LLC U.S. Private Equity Index® and the Cambridge Associates LLC U.S. Venture Capital Index® are reported each week in Barron's Market Laboratory section. In addition, complete historical data can be found on Standard & Poor's Micropal products and on our website, www.cambridgeassociates.com.

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 lentini@sommerfield.com.

This release is provided for informational purposes only. The information presented is not intended to be investment advice. This is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not indicative of future returns. Broad-based 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.

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