BOSTON, MA--(Marketwired - Jul 9, 2013) - In 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 U.S. 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 U.S. 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 U.S.-based partnerships for their respective asset classes (private equity and venture capital, respectively). 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.
|U.S. Private Equity and Venture Capital Index Returns (%)|
|Periods ending December 31, 2012|
|For the periods ending |
December 31, 2012
|Russell 2000 Composite||1.9||16.3||12.2||3.6||9.7||5.9||8.4||9.7|
Sources: Cambridge Associates LLC, Dow Jones & Company, Inc., Frank Russell Company, Standard and Poor's, and Thomson Datastream.
* Capital Changes Only
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, with Consumer Companies Topping the List for Q4; Manufacturing Had 2012's Best Showing among the Key Sectors
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 (IT), 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.
The Seven Largest Vintages in the VC Index Generated Positive Returns for 2012, and All but One Did for Q4
After producing two consecutive years of +13% returns in 2010 and 2011, the VC index earned only 7.2% in 2012. The index's performance for the year was hampered by low, though positive, earnings in the final three quarters.
All but one of the seven meaningfully-sized vintage years (each representing at least 5.0% of the index's value) had positive returns for the quarter; the 2000 vintage funds were the sole outliers, returning -0.8%. However, for the year, all seven of the largest vintages yielded positive returns, and the 2000 vintage funds reversed their quarterly performance to lead the way with a 13.0% return. Software was the biggest single contributor to the 2000 vintage funds' annual performance.
Software was the Best Performing Sector for the Quarter and the Year in the VC Index
The VC benchmark remained concentrated by sector, with only four sectors (healthcare, IT, media/communications, and software) being meaningfully sized. Of the four, software turned in the best performance for both the fourth quarter and the year, returning 3.5% and 23.0%, respectively. As in the PE index, media was the poorest performer for the quarter, returning -3.7%. For the year, however, IT had the lowest return, 7.1%, which was only slightly off the index's annual return as a whole. The other three sectors all generated double-digit returns for 2012.
VC Capital Calls and Distributions Increased Slightly for the Quarter; for the Year, Calls were Down but Distributions were Third Best Ever
Managers in the VC index called and returned more capital in Q4 than they did in Q3. Contributions rose 5.3% over the prior quarter, to just under $3.4 billion. Distributions were up 2.9%, to $6.1 billion. This was the fourth consecutive quarter in which distributions were higher than contributions.
Half of the quarterly contributions came from three vintages: the 2008, 2010, and 2012 funds. Funds in each of these vintage years called more than $500 million. On the distribution side, more than $1.0 billion went to investors from 2000 and 2004 vintage year funds.
For the year, fund managers in the VC index called $13.7 billion from their LPs, which was down 12.2% from 2011. Capital distributions in 2012 increased 50.5% over 2011, to nearly $22.2 billion, the third highest level of annual distributions in the history of the VC benchmark. As in the PE index, the strong annual distributions were helped by a relatively active M&A environment.
"The high annual level of distributions to VC fund LPs -- the only higher periods were during the bubble years of 1999 and 2000 -- was helped by a significantly higher average value of venture-backed M&A transactions," said Theresa Sorrentino Hajer, Managing Director and Venture Capital Research Consultant at Cambridge Associates. "Macro political factors, such as the "fiscal cliff" negotiations, and overall market uncertainty resulted in choppy initial public offering (IPO) performance, although enterprise technology companies overall gained favor. Fundraising has been in a reasonable range and remains below what managers are investing, which has favorably reduced the industry's capital base and should also help boost future returns," she added.
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 portfolio solutions, research services and tools (Research Navigatorsm and Benchmark Calculator), and performance monitoring, across all asset classes. The firm compiles the performance results for over 5,000 private partnerships and their more than 65,000 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. For more information about Cambridge Associates, please visit www.cambridgeassociates.com.
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. Venture Capital Index® and the Cambridge Associates LLC U.S. Private Equity 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.
Inquiries about these indices should be addressed to: Frank Lentini at Sommerfield Communications, 55 Broad Street, 20th Floor, New York, NY 10004; 212.255.8386; (fax) 212.255.8459; email firstname.lastname@example.org.