SOURCE: Cambridge Associates

Cambridge Associates

January 11, 2016 10:09 ET

US Private Equity and Venture Capital Outperformed Public Equities Over First Six Months of 2015, Says Cambridge Associates

VC Bested PE in Q2 and the First Half of 2015

BOSTON, MA--(Marketwired - Jan 11, 2016) - US private equity and venture capital funds generated solid returns in the quarter ending June 30, 2015. Both classes of alternative assets generated returns that outpaced the S&P 500, the Russell 2000® small cap, and the Nasdaq Composite indexes, according to benchmarks published by Cambridge Associates LLC. The same was true for the first half of calendar year 2015, with both benchmarks outperforming the same public equities indexes for the period.

For both the quarter and the half, venture capital produced stronger returns than private equity. The Cambridge Associates LLC U.S. Venture Capital Index® gained 6.7% for the second quarter and 11.0% for the half. Over the same periods, respectively, the Cambridge Associates LLC U.S. Private Equity Index® returned 3.8% and 6.5%. For comparison, the public index with the strongest returns for these periods among the three named above, the Nasdaq Composite, rose 1.8% for the quarter and 5.3% for the half.

Private Equity (PE) Performance Insights

Contributions and distributions were both up sharply in Q2, though at the half-year mark, both lagged the same period in 2014

Fund managers in the PE benchmark called $18.3 billion from their investors in the second quarter, and returned $39.1 billion, representing quarter-over-quarter increases of 20.2% and 39.3%, respectively. Funds raised in 2011 and 2012 were responsible for just over half of total contributions for the quarter. On the distribution side, the two largest vintages, 2006 and 2007, together distributed $19.5 billion.

While Q2 contributions and distributions were up significantly over Q1, together the two quarters were down in both categories over the same period in 2014: contributions dropped 25% while distributions fell 12%.

"Distributions have outpaced contributions in each of the last five years. Q2 was the 14th consecutive quarter for this trend and over that period the ratio has been approximately 2:1. This, of course, is what limited partners [LPs] are looking for in the long run and it is good to see private equity living up to expectations," said Keirsten Lawton, co-head of US Private Equity Research.

All of the significantly sized vintages in the PE Index earned positive returns in Q2

Six vintage years in the PE index were large enough to represent 5% or more of its value ("significantly sized") in the second period; all generated positive returns for the quarter, with gains ranging from a high of 6.3% for funds raised in 2011 to a low of 1.6% for those raised in 2008. Together, these six vintages represented more than three-fourths (78%) of the index's value.

The 2011 vintage's return benefited from write-ups in all but one sector (mining), with the largest dollar increases coming from investments in consumer, health care, information technology (IT) and energy companies. By contrast, the 2008 vintage's return was hurt primarily by write-downs in energy company investments.

Health care was the top-performing large sector

There were seven significantly sized sectors in the PE index in Q2, and all but one of them had a positive return for the quarter. The outlier was energy, which dropped 1.3%. Of the remaining six large sectors, health care led the way, earning 9.9% for the quarter. Technology companies represented the second and third best earners, with software generating a 7.0% returns and IT a gain of 6.2%.

Venture Capital (VC) Performance Insights

Distributions jumped in Q2

Venture capital fund managers asked slightly more from their LPs in Q2 than the previous quarter, calling $3.8 billion, an increase of 3.4% over Q1. About 87% of the total capital called came from funds formed in 2008 and 2011 through 2015, with an average call of $557 million. The change in distributions from Q1 to Q2 was much more radical. In the latter quarter, fund managers distributed $8.7 billion, a 31.0% jump over Q1. In only two years out of the last six years (2010 and 2015 of 2009-2014), Q2 distributions were lower than Q1.

"Almost three-quarters of the distributions in the second quarter went to limited partners of funds that were formed in six vintage years: 2000, 2005 through 2008, and 2010; this underscores investors' need for a long-term view of the asset class and venture's value creation. Each of these vintages distributed at least half a billion dollars to their LPs, and the middle vintage years, 2006 to 2008, each distributed more than $1.2 billion," said Theresa Sorrentino Hajer, managing director, Private Growth Research.

The second largest vintage in the VC index had the highest return

Eight vintages in the VC benchmark were significantly sized, and all earned positive returns for Q2. Among them, returns ranged from a high of 10.7% for the 2006 vintage, the second largest vintage in the index by weight, to a low of 1.6% for funds raised in 2005.

The 2006 vintage funds benefited primarily from write-ups in health care and software investments, as did those raised in 2008, the largest vintage in the index, which rose 5.8%. The 2005 vintage's relatively poor performance was due principally to write-downs in IT, which largely offset gains in health care and software.

Health care companies were the best performers in Q2

The venture capital benchmark was tightly concentrated by sector in the second quarter, with almost 81% of its value represented by just three sectors: health care, IT, and software. No other sector represented at least 5.0% of the index's value.

Of the three giants, the largest, IT, which represented almost one-third of the benchmark, gained 4.3%, the lowest return of the group. Software did slightly better, earning 4.5%, while health care, which represented just over a quarter of the benchmark, led the way with a 9.7% gain.

Electronics, while representing only 4.2% of the benchmark's value, generated a 31.2% return for the quarter, and hence was able to materially boost the index's overall performance for the quarter.

For additional details on the performance of the Cambridge Associates private equity and venture capital benchmarks in the second quarter go to http://www.cambridgeassociates.com/our-insights/research/us-pevc-benchmark-commentary-5/.

About the Indexes
Cambridge Associates derives its U.S. private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of June 30, 2015, the database comprised of 1,220 U.S. buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2015, with a value of $627 billion. Ten years ago, as of June 30, 2005, the index included 611 funds whose value was $179 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 June 30, 2015, the database comprised 1,589 U.S. venture capital funds formed from 1981 to 2015, with a value of roughly $194 billion. Ten years ago, as of June 30, 2005, the index included 1,071 funds whose value was about $56 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 (OptiCA digital platform), 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: Eric Mosher at Sommerfield Communications, 55 Broad Street, 20th Floor, New York, NY 10004; 212.255.8386; (fax) 212.255.8459; eric@sommerfield.com.

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