A tale of two benchmarks
BOSTON, MA–(Marketwired – Aug 8, 2017) – Private equity (PE) managers in the US posted their strongest annual returns since 2013 in 2016, while US venture capital (VC) funds performed worse last year than they have since 2008, according to the benchmark indexes of the two alternative asset classes from global investment firm Cambridge Associates.
The Cambridge Associates LLC US Private Equity Index returned 4.5% for the fourth quarter of 2016 and 12.9% for the full year. The Cambridge Associates LLC US Venture Capital Index posted a return of -0.1% during Q4 2016 and 0.3% for the full year. (See table below.)
“Private equity funds in the US generated double-digit returns for the year. In a departure from the last two years, energy companies were a positive contributor to returns in the private equity index instead of a drag,” says Keirsten Lawton, Managing Director and co-head of US Private Equity Research at Cambridge Associates.
“While public markets’ returns compounded, the venture capital industry had another year of disappointing exit activity, with few IPOs. Distributions outpaced contributions in 2016 but they declined from 2015 levels and mainly rewarded older vintage year fund performance, while younger private companies faced, overall, a more discerning funding environment,” says Theresa Hajer, Managing Director and co-head of US Venture Capital Research at Cambridge Associates.
Cambridge Associates derives its US Private Equity and Venture Capital Indexes from the financial information contained in its proprietary database of 1,370 US private equity funds and 1,708 US venture capital funds, with a combined values of roughly $841.9 billion.
Table 1. US Private Equity and Venture Capital Index Returns (IRR)
USD Terms • Periods Ended December 31, 2016 • Percent (%)
|Qtr||1 Yr||3 Yr||5 Yr||10 Yr||15 Yr||20 Yr||25 Yr|
|CA US Private Equity||4.5||12.9||10.0||13.2||10.0||12.4||12.4||13.4|
|Russell 2000® mPME||8.8||21.2||6.5||15.4||8.3||9.3||8.9||9.4|
|S&P 500 mPME||3.8||11.9||8.9||15.4||8.1||8.0||7.8||8.3|
|CA US Venture Capital||-0.1||0.3||11.7||14.0||9.4||6.8||26.1||25.4|
|Nasdaq Constructed * mPME||1.7||8.7||10.2||18.0||10.2||9.3||9.2||10.4|
|Russell 2000® mPME||8.8||21.1||6.5||15.2||7.6||9.1||8.8||9.8|
|S&P 500 mPME||3.8||11.9||8.9||15.3||7.7||7.7||7.8||8.8|
|Nasdaq Composite* AACR||3.8||12.0||8.9||14.7||6.9||6.7||7.7||9.1|
|Russell 2000® AACR||8.8||21.3||6.7||14.5||7.1||8.5||8.2||9.7|
|S&P 500 AACR||1.3||7.5||8.8||15.6||8.3||7.0||7.4||9.3|
Sources: Cambridge Associates LLC, Frank Russell Company, Standard & Poor’s and Thomson Reuters Datastream.
Private indexes are pooled horizon internal rates of return, net of fees, expenses and carried interest. Because the US Private Equity and Venture Capital indexes are capital weighted, the largest vintage years mainly drive the indexes’ 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.
* 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 US Private Equity Index in 2016:
- Contributions from US Private Equity Investors Rose and Distributions to Them Fell, Compared to 2015 Levels. During 2016, managers in the private equity index called $99.1 billion from asset owners, marking the highest year for capital calls since 2007 and a 12% increase from 2015. Distributions to investors during 2016 dropped 14% from 2015 levels to $122.2 billion. Despite the decline in distributions, 2016 was the fifth consecutive year in which distributions exceeded $100 billion.
- Energy Companies in US Private Equity Generated Strongest Returns in 2016. Of the sectors that represented more than 5% of the private equity index as of December 31, 2016, the one that posted the strongest return in the fourth quarter of 2016 and the full year was energy, with returns of 12.5% and 26.1%, respectively. Two other sectors with notably strong returns in 2016 were materials and consumer staples; they returned 22.3% and 30.6%, respectively, but together represented less than 5% of the index.
- US Private Equity Funds Raised in 2012 Performed Best in 2016. Out of seven vintage years that each represented at least 5% of the private equity index as of December 31, 2016, funds raised in 2012 performed best during the full 2016 calendar year, with a return of 20.5%. Funds raised in 2014 posted a 7.3% return during Q4 2016, the strongest return in that quarter.
Some highlights from the US Venture Capital Index in 2016:
- US Venture Capital Investors Contributed Less and Received Lower Distributions in 2016 Than in Previous Years. Managers in the US venture capital index called $12.8 billion and distributed $18.7 billion in 2016, decreases of 24% and 34%, respectively, from 2015 levels. 2016 marks the fifth consecutive year that more capital was distributed than called.
- IT Companies Were Top Performers in the US Venture Capital Index in 2016. Of the three sectors that each represented at least 5% of the venture capital index as of December 31, 2016, IT was the strongest performer for the fourth quarter of the year (0.1% return) and the full year (3.1% return). Health care companies returned -1.1% in Q4 2016, and consumer discretionary companies returned -3.9% for the full year.
- US Venture Capital Funds Raised in 2014 Performed Best in 2016. In the venture capital index, the 2014 vintage earned the full year’s best return, 8.8%, and the 2005 vintage produced the year’s worst, -4.2%. The 2014 vintage was also the top performer for the fourth quarter, with a 3.8% return.
For additional information on the performance of the Cambridge Associates US Private Equity and Venture Capital benchmarks in the fourth quarter of 2016, please visit [https://www.cambridgeassociates.com/benchmark/us-pevc-benchmark-commentary-11/].
About the Indexes
Cambridge Associates derives its US private equity benchmark from the financial information contained in its proprietary database of private equity funds. As of December 31, 2016, the database comprised 1,370 US buyouts, private equity energy, growth equity, and mezzanine funds formed from 1986 to 2016, with a value of $653.9 billion. Ten years ago, as of December 31, 2006, the index included 751 funds whose value was $274.5 billion.
Cambridge Associates derives its US venture capital benchmark from the financial information contained in its proprietary database of venture capital funds. As of December 31, 2016, the database comprised 1,708 US venture capital funds formed from 1981 to 2016, with a value of roughly $188.0 billion. Ten years ago, as of December 31, 2006, the index included 1,186 funds whose value was $78.6 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; investment consulting services; and access to investment research and tools across global asset classes. With every client, the firm aims to generate outperformance so they can maximize their impact on the world.
Cambridge Associates has more than 1,200 employees serving its client base globally. The firm maintains offices in Arlington, VA; New York; Boston; Dallas; Menlo Park and San Francisco, CA; Toronto; 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.