U.S. venture capital outperformed private equity during the third quarter of 2013, according to new performance numbers from Cambridge Associates. Quarterly returns for both indices were more than 2 percent greater than in the prior period. The Cambridge private equity index rose 5.1 percent in the third quarter, bringing its year-to-date return to 13.3 percent, while the venture capital index returned 6.5 percent and 14 percent year-to-date.
In the midst of a strong period for public equities and a healthy IPO market, U.S. private equity and venture capital funds generated positive returns for the third quarter of 2013, with venture capital outperforming private equity for the period.
Over short and medium terms ending on September 30, 2013, both alternative asset classes continued to struggle against the public markets. Over the long term the opposite remained true, as both private equity and venture capital funds delivered returns that easily bested those delivered by publicly traded equities, according to Cambridge Associates.
Quarterly returns for both indices were more than two percent greater than in the prior period. In the third quarter, the Cambridge Associates LLC U.S. Private Equity Index rose 5.1%, bringing its year-to-date return to 13.3%. For comparison, the S&P 500 gained 5.2% and 19.8% over the same periods. The Cambridge Associates LLC U.S. Venture Capital Index returned 6.5% and 14.0%, respectively, for the quarter and year-to-date. Its closest public market counterpart, the Russell 2000, gained 10.2% and 27.7% for the same periods.
The venture index’s ten-year return improved to 8.6% as of the third quarter, up from a return of 7.8% in the second. At quarter’s end, the spread between the ten-year return for the two indices was 5.6%, down from 6.3% at the end of the prior quarter. As of September 30, public companies accounted for about 20.4% of the private equity index and 17.4% of the venture capital index.
Private Equity Performance
The top five vintages in the private equity index, vintage years 2004 – 2008, accounted for 80% of the index’s value at the end of the third quarter. Funds raised in 2005 generated the highest quarterly return of this group, 6.2%, with valuation increases of more than a billion dollars each in energy, health care, consumer, and information technology (IT) companies helping to drive performance. Funds launched in 2006 rose the least among the top-sized vintages, 4.1%. The largest vintage year in the index, the 2007 funds, represented more than a quarter of the index’s value and gained 5.2%.
Capital Distributions Topped Contributions for the Seventh Straight Quarter
Fund managers in the private equity index called $15.3 billion from limited partners (LPs) during the third quarter, almost 16% more than in either of the previous two periods. Distributions to investors, though down slightly for the quarter to $32.3 billion, were still more than twice contributions and represented the seventh consecutive quarter in which distributions outpaced contributions. Over that 21-month period, fund managers distributed to their investors 1.85 times the amount of capital that they called.
“It was a great time to sell into the strong and rising public markets. Valuations were up, and managers responded to that and sold more than they bought,” said Keirsten Lawton, Managing Director, Private Equity Research at Cambridge Associates. “Additionally, the amount of capital held in funds that were well into their harvesting phase — 80% of capital resided in the 2004-2008 vintage year funds — leads us to expect this trend will continue.”
Managers distributed $9.7 billion to investors in the 2007 funds, the largest amount of distributions for a single vintage in the quarter. Limited partners in the 2011 vintage year paid in the most capital, $4.6 billion.
All Seven of the Largest Sectors in the Index Earned Positive Returns for the Quarter
Performance for the quarter across the largest sectors in the private equity index, those accounting for 5% or more of its value, was solid, with all seven sectors in the group generating positive returns. IT companies earned 7.7%, the highest return among the top seven, while energy companies rose just 3.7%, the lowest. The three largest sectors — consumer, energy, and health care — comprised almost 52% of the value of the index at quarter’s end; together, these sectors returned 6.0% on a dollar-weighted basis.
Of note, the software sector fell below the 5% cutoff for being included in the largest-sector group for the quarter.
Venture Capital Performance
Seven vintage years during the third quarter were at or above the 5% threshold for being top-sized in the venture index: 2000, 2004 – 2008, and 2010. All seven generated positive returns for the period, though the spread among the returns, 7.3%, was larger than among the top-sized vintage years in the private equity index. Topping the list for performance among the top seven were the 2007 funds, which returned 10.0%. Write-ups in health care, IT, and software companies helped drive the 2007 vintage’s performance. Funds raised in 2000 earned 2.7%, the lowest among the top-sized vintages.
Venture Index Distributions Continued to Outpace Contributions
Capital calls in the venture index were steady for the third quarter, but distributions were up. And, as in the private equity index, distributions outstripped contributions for the seventh consecutive quarter.
Fund managers called $3.0 billion from LPs during the quarter, a level approximately equal to the amount called in each of the first two quarters. Three vintage years, 2008, 2011, and 2012, accounted for almost half of the capital called during the quarter.
“Distributions during the period rose 25.4%, to $6.3 billion, helping to maintain a winning streak; the one-, three-, and five-year periods ending September 30, 2013 posted positive net distributions. The healthy exit environment and overall strong after-market performance has been a boon for the industry although it has contributed to a rise in pre-money valuations, particularly for later stage IT deals,” said Theresa Hajer, Managing Director, Venture Capital Research at Cambridge Associates.
Returns among All of the Largest Sectors in the Venture Index were Positive
The venture index was tightly concentrated by sector in the third quarter, with just four sectors — health care, IT, media, and software — comprising at least 5% of the index’s value. Of the four, media, the smallest, did best, returning 11.9%. IT companies had the weakest showing in the group, but still earned a solid 6.7%.
IT was the largest sector in the venture capital index and comprised almost one-third of the index’s total value at the end of the quarter. The three largest sectors in the venture index — IT, health care, and software — accounted for almost 77% of the index’s total value. The same three sectors attracted more than 81% of the total capital invested during the quarter.
For additional details on the second-quarter performance of the private equity and venture capital benchmarks, please see the Cambridge Associates commentary at https://www.cambridgeassociates.com/pdf/42.%20Third%20Quarter%202013%20USPE%20and%20VC%20Benchmark%20Commentary.pdf.
About Cambridge Associates and the Indices
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 Navigator(SM) 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 Institutional Limited Partners Association (ILPA), Australian Private Equity & Venture Capital Association Limited (AVCAL); the African Venture Capital Association (AVCA); 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); 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).
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.
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