SOURCE: Cambridge Associates

Cambridge Associates

April 05, 2017 10:09 ET

Private Equity and Venture Capital Funds Underperformed Public Markets During Q3 2016, According to Cambridge Associates

Long-Term Performance of Private Investments Continues to Outpace Public Market Indexes

BOSTON, MA--(Marketwired - Apr 5, 2017) -  Private equity (PE) and venture capital (VC) funds in the U.S. underperformed public markets during the third quarter of 2016, according to the benchmark indices of the two alternative asset classes from global investment firm Cambridge Associates. Over the longer term, the private indexes continue to outperform public markets.

The Cambridge Associates LLC U.S. Private Equity Index returned 3.7% in Q3 2016, equaling its performance for the previous quarter. In the same quarter, the Cambridge Associates LLC U.S. Venture Capital Index posted a 3.3% return. (See table below.)

"Private equity continues to deliver solid returns, above the long-term historical average of public equity. However, public markets have performed better in the bull market following the 2009 recession. While we expect continued strong absolute returns for private equity, we anticipate the longer-term relative outperformance to deteriorate. If that causes short-term investors to exit the asset class, that's likely a good thing," says Keirsten Lawton, Managing Director and co-head of U.S. Private Equity Research at Cambridge Associates.

"Performance for venture capital funds in the U.S. was somewhat lackluster during the first nine months of 2016. That said, things improved in the second and third quarter, including an uptick in third quarter distributions to limited partners, after a slow first quarter. We continue to see opportunities in the asset class for long term-oriented investors, particularly in early-stage venture capital funds," says Theresa Hajer, Managing Director and co-head of U.S. Venture Capital Research at Cambridge Associates.

Cambridge Associates derives its U.S. PE and VC Indices from the financial information contained in its proprietary database of 1,334 U.S. PE funds and 1,680 U.S. VC funds, with a combined value of roughly $820 billion.

Table 1. U.S. Private Equity and Venture Capital Index Returns (IRR)
USD Terms - Periods Ended September 30, 2016 - Percent (%)

  Qtr YTD 1 Yr 3 Yr 5 Yr 10 Yr 15 Yr 20 Yr 25 Yr
CA U.S. Private Equity 3.7 8.0 8.5 11.2 13.8 10.7 12.2 12.5 13.3
  Nasdaq Constructed* mPME 10.0 7.0 16.3 14.0 19.7 10.9 10.7 9.3 10.0
  Russell 2000® mPME 9.0 11.4 15.4 7.0 17.5 8.2 8.1 7.8 8.3
  S&P 500 mPME 3.9 7.8 15.4 11.7 17.5 8.2 8.1 7.8 8.3
CA U.S. Venture Capital 3.3 0.5 2.2 16.8 14.2 10.3 6.4 26.4 25.8
  Nasdaq Constructed * mPME 10.0 7.0 16.4 13.9 19.5 10.7 10.3 9.3 10.8
  Russell 2000® mPME 9.0 11.4 15.3 6.9 17.2 7.7 9.7 8.6 9.6
  S&P 500 mPME 3.9 7.8 15.4 11.6 17.3 7.9 7.9 7.9 9.0
  Nasdaq Composite* AACR 9.7 8.2 15.0 12.1 17.1 8.9 8.8 7.6 9.7
  Russell 2000® AACR 9.0 15.6 15.5 6.7 15.8 7.1 9.3 8.1 9.6
  S&P 500 AACR 3.9 10.6 15.4 11.2 16.4 7.2 7.1 7.9 9.3

Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor's and Thomson Reuters Datastream.

Notes: Private indices are pooled horizon internal rates of return, net of fees, expenses and carried interest. Because the U.S. Private Equity and Venture Capital indices are capital weighted, the largest vintage years mainly drive the indices' performance. Public index returns are shown as both time-weighted returns (average annual compound returns) and dollar-weighted returns (mPME). The CA Modified Public Markets 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. Over any one quarter, an mPME and time-weighted return will match, but they will begin to diverge over longer time horizons because the mPME calculation takes into account the size and timing of cash flows.

* 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.

Some highlights from the U.S. Private Equity Index in Q3 2016:

  • Distributions Fall, Contributions Rise for Investors in U.S. PE in Q3 2016. During Q3 2016, investors in the U.S. PE Index contributed $26.0 billion to managers and received distributions of $29.6 billion. The first nine months of 2016 saw lower distributions and higher contributions than the first nine months of the previous year.
  • All Big Sectors in U.S. PE Index Gained Value in Q3 2016. All six sectors that represented 5% or more of the U.S. PE Index's value -- consumer discretionary, energy, financials, health care, industrials and information technology -- produced a positive return in the third quarter of 2016. Returns ranged from a low of 3.4% for consumer discretionary companies to a high of 5.8% for financials.
  • 2014 Was the Best-Performing Vintage Year for U.S. PE in Q3 2016. Among the U.S. PE Index's nine vintages that were meaningfully sized -- that each represented at least 5% of the index -- returns ranged from -1.1% for funds raised in 2005 to 5.7% for those raised in 2014. Dollar increases in energy, information technology and consumer discretionary companies led the strong performance of the 2014 vintage.

Among the highlights from the U.S. Venture Capital Index in Q3 2016:

  • Distributions Continued to Outpace Contributions for U.S. VC Investors in Q3 2016. Venture capital managers in the U.S. called $3.1 billion from investors during the third quarter, down 9% from the previous quarter and the second lowest contribution level since Q3 2011. Distributions to U.S. VC investors were $5.4 billion, an increase of 16% from Q2 2016. Distributions have outpaced contributions in every quarter since the beginning of 2012.
  • Health Care Companies Led U.S. VC Index in Returns in Q3 2016. All three sectors that represented 5% or more of the U.S. VC Index in Q3 2016 -- information technology, health care and consumer discretionary -- posted a positive return for the quarter. Health care companies gained the most value, returning 7.1% in Q3. The largest sector, information technology, posted a 3.6% return.
  • All Big Vintage Years in U.S. VC Index Posted Positive Returns in Q3 2016. Funds raised in 2006 were the strongest performer in Q3 2016 with a return of 8.6%. Health care and information technology companies were largely behind the 2006 vintage's healthy return. The lowest return of any other meaningfully sized vintage -- each of which represented at least 5% of the VC Index in Q3 2016 -- was 1.3%, from vintage 2012 funds.

For additional information on the performance of the Cambridge Associates U.S. Private Equity and Venture Capital benchmarks in the third quarter of 2016, please visit https://www.cambridgeassociates.com/benchmark/us-pevc-benchmark-commentary-10/.

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 September 30, 2016, the database comprised 1,334 U.S. buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2016, with a value of $630 billion. Ten years ago, as of September 30, 2006, the index included 724 funds whose value was $237 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 September 30, 2016, the database comprised 1,680 U.S. venture capital funds formed from 1981 to 2016, with a value of roughly $190 billion. Ten years ago, as of September 30, 2006, the index included 1,163 funds whose value was about $70 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 global investment firm founded in 1973 that builds customized investment portfolios for institutional investors and private clients around the world. Working alongside its early clients, among them several leading universities, the firm pioneered the strategy of high equity orientation and broad diversification, which since the 1980s has been a primary driver of performance for these leading fiduciary investors. Cambridge Associates serves over 1,100 global investors -- primarily foundations and endowments, pensions and family offices -- and delivers a range of services, including outsourced investment (OCIO) solutions, traditional advisory services, and access to research and tools across global asset classes. Cambridge Associates has more than 1,300 employees -- including over 150 research staff -- serving its client base globally. The firm maintains offices in Arlington, VA; Boston; Dallas; Menlo Park and San Francisco, CA; London, UK; 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.

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.

This release is provided for informational purposes only and 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 release is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction. Past performance is not a guarantee of future returns. With regard to any references to securities indices, such indices 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.

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