Private equity declined in developed markets outside the U.S. for the first time after a series of strong quarterly returns, according to data from Cambridge Associates. Cambridge’s global developed markets private equity and venture capital ex-U.S. index fell 5 percent in the third quarter. For the 12 month period ending Sept. 30, 2014, the index rose 10.9 percent.
A weakening Euro during 2014’s penultimate quarter contributed to a loss, as measured in U.S. dollars, for private equity investments in developed global markets outside the U.S. — the first following a string of eight consecutive positive quarterly returns. Funds investing private equity in emerging markets did better, ending Q3 with a positive return. Both classes of alternative assets outperformed their public market counterparts for the period, according to global institutional advisor Cambridge Associates LLC (CA).
For the quarter ending September 30, 2014, the Cambridge Associates LLC Global ex U.S. Developed Markets Private Equity and Venture Capital Index fell 5.0%; for the 12-month period ending on the same date, it rose 10.9%. For the same periods, respectively, the MSCI EAFE returned -5.9% and 4.3%. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index earned 1.6% in Q3 and 17.5% for the year ending September 30. For comparison, the MSCI Emerging Markets returned -3.4% and 4.7% over the same periods.
With the exception of the three-year mark, the CA global developed markets index outperformed the MSCI EAFE in every time period shown in the table above. The CA emerging markets index posted higher returns than the MSCI Emerging Markets over every time period shown.
Q3 Highlights from the CA Global ex U.S. Developed Markets Private Equity and Venture Capital Index
Calls and Distributions both Increased Sharply for the Period
Distributions in Q3 outpaced contributions for the tenth consecutive quarter, with fund managers returning almost $20 billion to their limited partners (LPs), a 33% increase over Q2. Calls rose 71% over the prior period to $11.0 billion.
“As a group, investors in funds raised in 2006 had the biggest payday of any vintage, receiving almost $6 billion in distributions. But fund managers in each of the five years from 2004 to 2008 distributed more than $1.2 billion to their LPs, which combined accounted for 85% of the capital distributed in the quarter. On the contributions side, LPs in just three vintage years — 2011, 2012, and 2013 — accounted for 78% of the total capital called in Q3,” said Andrea Auerbach, Managing Director and Head of Global Private Investment Research at Cambridge Associates.
The Top-sized Vintage Years All Had Negative Returns in Q3
The negative quarterly return for the index reflected falling returns for a majority of the vintage years that comprised it, including each of the six vintages that represented 5% or more of its value. Because returns in local currencies were much stronger than the USD-based returns calculated for the index, however, the index’s negative return does not necessarily reflect how portfolio companies were performing in absolute terms during the quarter.
Earnings for the top six vintages by weight ranged from a high of -2.2% for funds launched in 2011 to a low of -6.3% for funds started in 2005. The two largest vintages in the index, 2006 and 2007, fell about 5% each during the quarter due to widespread write downs.
IT was the Best Performer of the Major Sectors, but it Still Posted a Loss
Seven sectors in Q3 were significantly sized (i.e., represented 5% or more of the index) and all of them had negative returns for the quarter. Of these, information technology (IT) performed best, earning -2.5%, while media had the lowest return: -10.8%. Consumer, perennially the largest sector by weight and representing almost a quarter of the index, fell 3.9%. Health care, the second largest sector, dropped 3.4%.
UK Companies had Highest Return in the European Region
All five regions comprising 5% or more of the index had negative returns for the quarter. Of the five, four were located in Europe, where returns ranged from a high of -4.3% for the UK to a low of -6.5% for France. As a group, companies based in the U.S. returned -2.2%, the best of the five largest regions. Japan, while accounting for less than 2% of the index, was the only region in the developed markets index to post a positive return in Q3.
Q3 Highlights from the CA Emerging Markets Private Equity and Venture Capital Index
Capital Calls and Distributions both Fell
Fund managers in the CA emerging markets index called $3.9 billion from investors during Q3, a 19% drop from the prior quarter. Investors in vintage years 2010, 2011, and 2012 together contributed about 68% of this total. Fund managers distributed $4.1 billion during the period, a nearly 43% decrease from Q2, which had the highest quarterly distribution in the history of the emerging markets benchmark. The 2007 funds distributed $1.6 billion to investors, the most of any vintage.
All but One of the Largest Vintages Earned a Positive Return in Q3
Returns of the seven largest vintages in the emerging markets index ranged from a high of 7.8% for funds raised in 2010 to a loss of 4.1% for funds raised in 2005. The latter was the only vintage of the top seven to post a negative return in Q3. The loss was due primarily to write downs in media and software companies. The 2010 vintage year return was helped primarily by write ups in IT companies. The largest vintage in the index, the 2007 funds, represented just over 30% of the benchmark’s value and returned 0.8% for the period.
IT Companies Led the Aay among the Largest Sectors
Paralleling the sector’s performance in the developed markets index, IT companies also earned the highest return among meaningfully-sized sectors in the emerging markets benchmark, where they rose 4.2% for the quarter. Returns for the five other meaningfully-sized sectors were all positive and ranged from 3.9% for health care companies to 0.6% for consumer. Manufacturing, the third largest sector in the index by weight after consumer and IT, earned 3.3%.
The Emerging Markets Index Remained Highly Concentrated by Region
China and India remained the only two countries representing 5% or more of the index and both earned positive returns for Q3. Between the two, India repeated its second quarter performance as the top performer, with companies based there earning 6.0% for the quarter. Companies based in China accounted for 38.4% of the index’s value and returned 5.6%.
Five other countries in the index represented at least 2.9% of its value: Australia, Brazil, South Korea, Singapore, and the UK.
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-4/.
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 September 30, 2014, the database comprised 732 global ex US developed markets private equity and venture capital funds formed from 1986 to 2014 with a value of about $274 billion. Ten years ago, as of September 30, 2004, the benchmark index included 345 global ex US developed markets funds, whose value was roughly $67 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 September 30, 2014, the database comprised 543 emerging markets funds formed from 1986 to 2014 with a value of about $142 billion. Ten years ago, as of September 30, 2004, the benchmark index included 202 emerging markets funds, whose value was $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).