Private Equity Returns Inch Up
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Private Equity Returns Inch Up

Private equity funds in the U.S. returned to positive territory in the quarter ending September 30, 2012, following a slightly negative second quarter. U.S. venture capital funds, while significantly underperforming private equity, also turned in a positive performance for the third quarter. Performance of both classes of alternative assets lagged public market returns, which rebounded from a poor second quarter to generate robust third quarter results.

The Cambridge Associates U.S. Private Equity Index® returned 3.6% for the third quarter, a 3.7% increase over the prior period. The index stood at 9.2% year-to-date and was up more than 15% over the preceding 12 months. The Cambridge Associates U.S. Venture Capital Index® earned 0.6% in the third quarter, mirroring its result in the second quarter. The venture index’s year-to-date and one-year returns were 6.1% and 7.7%, respectively. The following table compares the performance of the private equity and venture capital benchmarks with that of some important public market indices.

U.S. Private Equity and Venture Capital Index Returns
for Periods ending September 30, 2012

(click image to enlarge)

The private equity index outperformed indices tracking large and small public companies in all six of the time horizons longer than one year listed in the table above, from the three-year to the 25-year mark. The venture capital index trailed the public markets in five of the nine periods in the table. Over the longer time horizons, the VC index, like the PE index, significantly outperformed the public markets.

At the end of the third quarter, public companies comprised 21.0% of the value of the PE index and 14.7% of the VC index. Both figures were down from the prior quarter.

The Largest Vintage Year in the PE Index Was Also the Best Performer Among the Top-Sized Vintages

Only five vintages in the PE index represented at least 5% of the benchmark’s value. All five had positive returns for the quarter. Funds launched in 2007 comprised the largest group in the index, representing more than one-fourth (25.8%) of its value, and had the highest return of the top five for the third quarter: 4.5%. Most of the gains in the 2007 funds were due to increased valuations for energy companies, though write-ups in healthcare and manufacturing also contributed.

The second largest group of funds in the PE index was the 2006 vintage, which represented 23.4% of the index’s value and earned 3.8% for the period.

Capital Distributions in the PE Index Outpaced Contributions for the Sixth Time Out of the Past Eight Quarters

Fund managers in the private equity index called $16.7 billion from investors in the third quarter, an increase of almost one-third over the previous quarter. They distributed $21.6 billion, a drop of almost $8 billion from the prior period, when distributions were at their highest level since the middle of 2007.

Over the last two years, private equity fund managers have distributed 1.3 times as much capital as the called, and in six of those quarters, distributions were higher than contributions.

Largest Sectors in the PE Index All Had Positive Third-Quarter Returns

The performance of all eight of the significantly sized sectors in the PE index was solid during the third quarter, with each sector generating a positive return. Manufacturing companies in the index turned in the strongest performance of the group, earning 5.2%. Healthcare was second, generating a 5.0% return.

Energy Companies Continued to Benefit from Investment Dollars

“For the fourth quarter in a row, energy companies, which represented the second largest sector in the PE index by weight, received the greatest amount of investment capital, though consumer companies were not far behind. Together, the two sectors attracted about 38% of all invested capital for the third quarter, which was a slight increase over the long-term average,” said Keirsten Lawton, Senior Consultant, Private Equity Research at Cambridge Associates.

Returns in the Venture Capital Index Were Mixed

Seven vintages of funds in the venture capital index represented at least 5% of the benchmark’s value in the third quarter. Of these vintages, four had positive returns for the quarter; the three with negative returns included the 2006 vintage, the largest in the index, which dropped 1.0% for the period. The best performing of the largest vintages were funds launched in 2000, which earned 2.5% for the quarter, due primarily to gains for software companies. The earnings for the 2006 funds were dragged down by lost value in information technology (IT) companies.

Distributions in Venture Capital Index Hit Highest Mark in More Than A Decade

Venture capital fund managers called $3.2 billion in the third quarter from their limited partners, a 17.4% decrease from the prior quarter. Managers distributed $5.9 billion, a 5.5% quarter-to-quarter increase and the highest level of quarterly distributions for the VC benchmark since the first quarter of 2001. As in the PE index, this marked the sixth time in the last eight quarters in which distributions outstripped contributions. Together, distributions from the 2000 and 2004 vintage year funds represented one-third of the total distributions for the quarter.

Venture Capital Index Remains Highly Concentrated by Sector

“While the venture capital benchmark has become more diversified by vintage year, it remains tightly concentrated by sector. Only four sectors — healthcare, IT, media, and software — represented more than 5% of the index’s value, and the three largest — IT, healthcare, and software — comprised almost three-fourths of the index’s total value.

For the second consecutive quarter, three of the four largest sectors had positive returns, with software leading the way earning 5.8% for the period. The only loser was IT, which dropped 2.7%,” said Theresa Sorrentino Hajer, Managing Director and Venture Capital Research Consultant at Cambridge Associates.

Healthcare Companies Received the Most Capital in VC Index

Roughly three-fourths of the capital invested in the VC index in the third quarter went to companies in healthcare, IT, and software. Healthcare received the most of any sector, more than 32% of the total investments during the period.

© 2013 PEPD • Private Equity’s Leading News Magazine • 2-5-13

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