U.S. Private Equity and Venture Capital Funds Outpaced Public Equities

U.S. Private Equity and Venture Capital Funds Outpaced Public Equities

CA NFIn a fourth quarter fraught with political uncertainties, including the “fiscal cliff” negotiations, and other macroeconomic factors affecting the public markets, U.S. private equity and venture capital funds both generated positive returns for their investors and outperformed public equities, which were largely negative for the quarter. Continuing on momentum from a strong finish in 2011, both private asset classes also posted solid results for the calendar year, according to Cambridge Associates.

The Cambridge Associates LLC US Private Equity Index earned 3.5% for the quarter ending December 31, 2012, and 13.8% for the year ending on the same date. The Cambridge Associates LLC US Venture Capital Index returned 1.2% for the quarter and 7.2% for the year. The indices are derived from performance data compiled for funds that represent the majority of institutional capital raised by US-based partnerships for their respective asset classes. The following table details the performance of the Cambridge benchmarks against several key market indices. Returns for periods of one year and longer are annualized.

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The private equity benchmark showed consistently strong performance: with the exception of the one-year period, it bested all four public equity indices in every time period shown in the table above. The venture capital index’s performance has been more mixed against its public equity counterparts. But over the longest time horizons shown, the 15-year, 20-year, and 25-year periods, it significantly outperformed the public markets and the private equity index.

For the 10-year mark, private equity outperformed venture capital, 14.1% versus 6.9%, respectively. The 7.2% spread between the two indices is down from a peak of 12.7% at the end of the third quarter of 2010.

Double-Digit Returns in the Major Vintage Years Helped Drive the PE Index’s 2012 Performance
The five largest vintages in the PE index all had positive returns for the fourth quarter, and all but one of them had double-digit returns for the year. The five largest vintages — 2004, 2005, 2006, 2007, and 2008 — together comprised nearly 82% of the index’s value on December 31, 2012. Each of the five vintages saw asset values improve by at least $1.3 billion during the fourth quarter.

The 2008 vintage was the quarter’s best performer, earning 5.4%; for the year, funds launched in 2005 took top honors, returning 19.2%. The 2005 vintage gained most from write ups in the value of consumer-sector portfolio companies, but also benefited from valuation increases in healthcare and IT businesses. The 2007 vintage was the largest, representing almost 27% of the index’s value. It earned 3.2% for the quarter and 13.0% for the year. Write ups in consumer and energy companies accounted for roughly 40% of the vintage’s increased valuations.

All Eight Key Sectors in the PE Index Generated Positive Returns for the Quarter and the Year
In dollar terms among sectors in the PE index for the fourth quarter, valuations increased the most for consumer, healthcare, energy, financial services, and manufacturing companies. These sectors, along with information technology, media, and software, comprised the eight largest sectors in the index, each representing at least 5% of the index’s total value.
Consumer was also the quarter’s biggest earner, posting a 6.7% gain. For the year, consumer companies in the PE benchmark’s fund portfolios earned 15.8%. On December 31, 2012, these companies represented 20.2% of the PE index’s value.

The year’s best performing sector was manufacturing, returning 20.6%. The worst performing sector for both the quarter and the year was media, which returned 0.9% and 5.9%, respectively. (Media was the only sector among the top eight that did not produce a double-digit return for 2012.)

Distributions Hit an All-time High for the PE Index
Investors (referred to as limited partners or LPs) in funds tracked by the PE index in Q4 received the single largest quarterly distribution in the 27 years that Cambridge Associates has been measuring the industry’s performance. Fund managers returned nearly $48.6 billion for the period, an increase of 122.6% over distributions in the previous quarter. Investors in funds launched in 2006 and 2007 received approximately 47% of all capital distributed during the quarter.

Contributions for the quarter were also up. Fund managers in the PE index called about $25.5 billion from their LPs, a 46.3% increase over Q3. LPs in funds raised in 2007 contributed the most of any vintage year — about $9.7 billion, or 39% of the total capital called.

For the year, fund managers in the PE index called $71.3 billion, which was down from both 2010 and 2011. But they also distributed more capital — some $118 billion — than in any calendar year since the index’s inception.

“Many factors drove the record quarterly and annual level of distributions, including an active M&A [mergers and acquisitions] market. Though volume was up in 2012 from 2011, the average transaction size decreased. Distributions were also helped by friendly credit markets, which enabled recapitalizations, and anticipated tax hikes in the New Year, which motivated owners to sell,” said Keirsten Lawton, Senior Consultant, Private Equity Research at Cambridge Associates.

Cambridge Associates is a provider of 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 portfolio solutions, research services and tools, and performance monitoring, across all asset classes. Cambridge Associates was founded in 1973 and has more than 1,100 employees with offices in Arlington, VA; Boston; Dallas; Menlo Park; London; Singapore; Sydney; and Beijing (www.cambridgeassociates.com).

© 2013 PEPD • Private Equity’s Leading News Magazine • 7-9-13

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