Venture capital outperformed private equity in the second quarter, with the private equity index returning 3 percent, a 1.5 percent drop from the previous quarter, and the venture capital index returning 4.3 percent, an improvement of 1.8 percent from the previous quarter, according to Cambridge Associates. Both private equity and venture capital posted returns that matched or bettered major indices that track the performance of large public companies, Cambridge said.
U.S.-based private equity and venture capital funds turned in a solid second quarter, posting returns that matched or bettered the major indices that track the performance of large public companies. Venture capital outperformed private equity for the period. Over intermediate periods the results for both alternative asset classes versus public equity indices were mixed, though over the long term, PE and VC funds significantly outperformed public equities, according to Cambridge Associates.
For the quarter ending June 30, 2013, the Cambridge Associates LLC U.S. Private Equity Index® returned 3.0%, a 1.5% drop from the previous quarter. The Cambridge Associates LLC U.S. Venture Capital Index® returned 4.3% in the second quarter, an improvement of 1.8% over its Q1 performance. The table below details the performance of the Cambridge Associates benchmarks against several key public market indices. Returns for periods of one year and longer are annualized.
U.S. Private Equity and Venture Capital Index Returns (%)
Periods ending June 30, 2013
For the periods ending June 30, 2013 Qtr. Year to Date 1
USPE 3.0 7.0 15.6 15.5 8.2 14.1 11.3 13.4 13.2
USVC 4.3 7.1 8.9 13.5 5.7 7.8 22.8 30.1 19.8
DJIA 2.9 15.2 18.9 18.2 8.6 7.9 5.9 10.0 10.9
NASDAQ Composite* 4.2 12.7 16.0 17.3 8.2 7.7 4.0 8.2 9.0
Russell 2000 Composite 3.1 15.9 24.2 18.7 8.8 9.5 6.6 8.9 9.3
S&P 500 2.9 13.8 20.6 18.5 7.0 7.3 4.2 8.7 9.7
Sources: Cambridge Associates LLC, Dow Jones & Company, Inc., Frank Russell Company, Standard and Poor’s, and Thomson Reuters Datastream.
* Capital Changes Only
The performance of the major components of both Cambridge Associates benchmarks was consistently positive for the second quarter. Returns for all of the largest vintage years in both indices (i.e. those representing at least 5% of the index’s value) were positive, as were the returns for the largest sectors in each index.
The Largest Vintage in the PE Index also had the Highest Return
Only five vintage years in the private equity benchmark were significantly sized. Their returns for the quarter ranged from 3.6% for funds raised in 2007, the largest vintage in the index, to 2.3% for funds raised in the following year, 2008. Increased valuations in consumer, IT, energy, and financial services companies were the primary drivers of the 2007 funds’ performance. Write-downs in mining companies were the largest drag on the 2008 vintage. The second largest vintage in the index, the 2006 funds, returned 2.5% for the quarter.
Capital Calls Dropped for the Quarter in the PE Index, while Distributions were at Near-historic Highs
Managers of funds included in the PE index called the least amount of capital from their limited partners in a given quarter in almost four years — about $12.7 billion, a 0.3% drop from the first quarter. Distributions for the second quarter, however, were very strong.
“Fund managers distributed the second largest quarterly amount of capital to their LPs in the more than 27-year history of the private equity index. Distributions have now outnumbered contributions for six consecutive quarters. This high level of distribution activity alongside strong public equity performance may cause LPs to be underweight private equity and perhaps explains a fundraising market that has felt a bit overheated,” said Keirsten Lawton, Senior Consultant, Private Equity Research at Cambridge Associates.
The 2007 vintage year funds distributed the most capital during the quarter, $9.1 billion. The 2011 funds called the most capital — more than $3.5 billion.
Software and IT had the Highest Returns among the Largest Sectors in the PE Index
Of the seven largest sectors in the PE index, returns in the second quarter ranged from a high of 6.2% for software-related companies to a low of 1.9% for energy companies. Companies in the information technology sector posted a 5.3% return, the second highest in the benchmark. Consumer, consistently the largest sector in the index, returned 4.9%.
Energy Companies Topped the List of Investment Targets in the PE Index
Fund managers funneled the largest amount of their investment capital to energy companies. Overall, companies in the energy sector received 29% of the total amount of capital invested during the quarter in the private equity benchmark.
The 2005 Funds were the Best Performers in the VC Index
There were seven significantly-sized vintages in the venture capital index, compared to five in the PE index. Collectively, the seven represented almost 78% of the VC benchmark’s value in the second quarter. Returns among them ranged from a high of 6.3% for funds raised in 2005, which were helped by write-ups in software, healthcare, and IT, to a low of 1.3% for funds raised in 2000, which earned modest returns across all sectors. The 2008 vintage year funds were a close second in earnings, returning 6.2% for the quarter.
The largest vintage in the VC index, the 2006 funds, rose 4.3% for the period. The primary drivers of the 2006 vintage’s performance were large write-ups in healthcare and IT.
Calls and Distributions in the VC Benchmark Increased over the Prior Quarter
Venture capital fund managers in the index called $3.0 billion from their investors during the second quarter, an increase of 4.6% from the amount called in Q1. Fund managers returned $4.9 billion, an increase of 44.3% over the previous period.
“This was the sixth quarter in a row that fund managers in the VC index distributed more money than they called. Four different vintages — 2004, 2005, 2006, and 2008 — each distributed more than $600 million to their LPs. On the call side, funds in just two vintage years, 2012 and 2008, contributed almost 44% of the total capital called during the quarter,” said Peter Mooradian, Managing Director, Venture Capital Research at Cambridge Associates.
Software and Healthcare were Top Performing Sectors in the VC Index
As in the PE index, software companies posted the highest return in the venture capital benchmark for the quarter, 8.6%. Healthcare, the second-largest sector in the index, rose 7.9%, the second highest return. The other two significantly-sized sectors in the benchmark, IT and media, returned 3.8% and 3.6%, respectively.
Three Sectors Pulled in the Bulk of VC Investment Capital for the Quarter
Together, companies in the three largest sectors — IT, healthcare, and software — represented 76% of the VC benchmark’s value. These three sectors together attracted more than 81% of the total capital invested by fund managers in the VC index for 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/40.%20Second%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 over 950 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 over 5,400 private partnerships and their more than 68,000 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.
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).
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.