Returns for U.S.-based private equity and venture capital funds were essentially flat for the quarter ending June 30, 2012; the performance of both alternative asset classes was down sharply from the prior quarter. However, private equity and venture capital funds outperformed U.S. public equity markets during the second quarter. Venture capital fund returns slightly bested those for private equity for the period, according to a new commentary from Cambridge Associates.
The Cambridge Associates U.S. Private Equity Index returned negative 0.1% for the second quarter, a 5.5% drop from the prior quarter. For comparison, the S&P 500 returned negative 2.8% for the period, a fall of 15.4% from the first quarter. The Cambridge Associates U.S. Venture Capital Index® was off 4.1% from its first quarter performance, returning just 0.6% for the second period. The Russell 2000, the small company index, returned negative 3.5%, putting it 15.9% below its performance in the first quarter.
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As the table above indicates, for the first six months of 2012 the private equity and venture capital benchmarks performed almost identically, earning 5.5% and 5.4%, respectively. Both trailed public equities for the period. Over the three longest time horizons in the table — the 15-, 20-, and 25-year marks — the reverse was true, with both benchmarks significantly outperforming comparable public market indices.
Funds Raised in 2008 had the Highest Return among the PE Index’s Largest Vintage Years.
Three of the five largest vintage years by weight in the private equity index generated positive returns for the second quarter, including the two largest, 2007 and 2006. Together, these two vintages represented 47% of the index’s value; they earned 0.6% and 0.9%, respectively. The best performing vintage year of the top five, 2008, earned 1.6%, while the worst, the 2004 funds, lost 3.4% for the period.
The 2004 funds’ relatively poor performance was driven primarily by decreased valuations in information technology (IT) companies. IT losses also impacted the 2008 funds, but these were offset by valuation gains in hardware, healthcare, and manufacturing companies.
In the PE Index, Capital Calls were Down while Distributions were Up
During the second quarter fund managers in the private equity index asked for the lowest level of contributions from their limited partners in the past three years: $11.3 billion, an almost 17% decrease from the prior period. At the same time, capital distributions jumped almost 73% from the first quarter, to $28.7 billion, the second largest quarterly distribution in the last five years.
“This was the fifth time in the last seven quarters that fund managers in the PE index returned more capital to their limited partners than they collected through contributions. And the scale of the difference was, historically, striking, in that it was the first quarter in the past 20 years that fund managers in the index distributed more than 2.5 times the amount that they called,” said Keirsten Lawton, Senior Consultant, Private Equity Research at Cambridge Associates. “The second quarter also marked the sixth quarter in a row in which the 2007 funds, the largest vintage in the index, called the most capital — they are now about 70% drawn. The largest distribution came from the 2006 funds, whose managers returned 5% of contributed capital to their investors.”
Software was the Best Performing Sector, IT was the Worst
Three of the eight sectors representing at least 5% of the PE index’s value earned positive returns for the quarter. Software led the way, earning 7.4%, followed by healthcare’s 2.6% and consumer’s 1.5%. IT was the worst performer, returning negative 4.1%. The three largest sectors in the index — consumer, energy, and healthcare — represented more than 50% of the index’s value and returned 0.2% on a dollar-weighted basis for the quarter.
Software was also the best performing of the four largest sectors in the VC index, where it generated a second-quarter return of 6.9%. Because software represented a larger percentage weight in the VC index than the PE index (17.5% vs. 7.4%), its strong performance had a bigger impact in helping to keep the VC index’s return in positive territory.
“The only significantly-sized sector that had a loss for the quarter in the VC index was IT, which dropped almost two percent. Since IT was also the largest sector in the index, representing just over one-third of its value, it was the largest drag on the index’s performance during the period, and offset positive returns in the software, healthcare and media sectors,” said Peter Mooradian, Managing Director and Venture Capital Research Consultant at Cambridge Associates.
A copy of Cambridge Associates’ commentary on the second-quarter performance of its U.S. private equity and venture capital benchmarks is available by clicking HERE.
© 2012 PEPD • Private Equity’s Leading News Magazine • 11-14-12