In a challenging third quarter for equity investors both public and private, US private equity and venture capital funds each lost ground for the first time in several years, though the latter only fractionally.
Both bested public market equity returns, according to benchmarks published by Cambridge Associates LLC.
For the quarter ending September 30, 2015, the Cambridge Associates LLC US Private Equity Index returned -1.4 per cent. The Cambridge Associates LLC US Venture Capital Index posted a return of -0.4 per cent. Over the first three quarters of the year, the same indexes respectively gained 5.3 per cent and 11.3 per cent. For comparison, the technology-heavy Nasdaq Composite lost 7.4 per cent in Q3 and 2.4 per cent during the first three quarters. The table below provides additional comparisons with several key public equity indexes over a number of time periods. The CA PE index outperformed the Russell 2000 and the S&P 500 over all nine time horizons shown; the CA VC index beat out these same indexes in every period except the 15-year mark.
In Q3 2015, fund managers called and returned less capital than in the previous quarter. Calls dropped 6.1 per cent to USD17.8 billion, while distributions fell 9.8 per cent to USD35.7 billion. Over the last four quarters, contributions and distributions dropped 23 per cent and 9 per cent respectively compared with the same period in 2014.
"In distribution activity, 2006 and 2007 continue to represent the proverbial pig working its way through the python. Almost half of the third quarter's USD16.7 billion in private equity distributions went to LPs of these two (largest) vintages in the index. On the contributions side, nearly two-thirds came from the 2011, 2012, and 2014 vintages – a total of about USD11.9 billion. In Q3, distributions surpassed contributions by 1.4 times, marking the 15th consecutive quarter in which this held," said Keirsten Lawton, co-head of US Private Equity Research.
Third quarter returns for the six meaningfully sized vintages in the private equity index ranged from -0.3 per cent for funds raised in 2012 to -3.2 per cent for funds raised in 2008. (A vintage is "meaningfully sized" if it contributes at least 5.0 per cent to the index's value by weight.) Nearly equal write-ups in health care and write-downs in energy were the primary contributors to the 2012 vintage's relatively flat performance. The main driver for the 2008 vintage's poor performance was write-downs on investments in energy companies.
The largest vintage in the index, 2007, returned -2.4 per cent. Write-downs in energy and construction-related businesses were the principal factors behind the loss.
By the end of the third quarter, seven sectors in the PE index were significantly sized and six had positive returns for the quarter. The lone exception was energy, which suffered a double-digit decline of 11.9 per cent. Software companies fared best, returning 5.9 per cent, followed by a 4.7 per cent gain in health care. Manufacturing and consumer companies were modestly positive, returning 0.2 per cent and 0.4 per cent respectively.
As in the PE Index, fund managers in the venture capital index called and distributed far less capital in Q3 than they did in the prior quarter. Calls dropped 13.0 per cent to USD3.6 billion, while distributions suffered an even greater decline, falling 45.1 per cent to USD5.1 billion. In parallel with the PE Index, Q3 marked the 15th consecutive quarter in which distributions in the VC index outpaced contributions.
Almost two-thirds (64 per cent) of the total capital called in Q3 came from funds formed from three consecutive vintage years: 2012, 2013 and 2014. The bulk of distributions (69 per cent) during the quarter went to LPs of funds formed in 2004, 2006-2008 and 2010. Each of these vintage years distributed more than USD550 million in the quarter.
Seven vintages in the VC index were meaningfully sized at the end of Q3; three of them had gains for the quarter while the other four declined. The best performer of the seven was the 2011 vintage, which returned 7.0 per cent, helped primarily by significant write-ups in health care and information technology (IT) companies. Write-downs in health care were the principal culprit of the poorest performing of the large vintages, 2005, which dropped 3.4 per cent during the period.
"Of the four largest vintage years (2006-08 and 2010), three (2006-08) were down during the quarter. Similar to in the public markets, losses in the health care sector were one of the drags on performance in all but the 2007 vintage. This was a sharp reversal from the prior three quarters when health care performed strongly in the VC index as well as the public markets, and reflects the current volatility in the market," says Theresa Sorrentino Hajer, managing director, Private Growth Research.
Only three sectors in the VC index were meaningfully sized, and two of them had positive returns. Software led the way with a gain of 3.1 per cent, followed by IT, which was up 1.2 per cent. Health care, the second largest sector in the index (behind IT) and representing one quarter of its value, returned -3.9 per cent.
While not meeting the definition of meaningfully sized, electronics companies represented more than 4 per cent of the index and were down 1.3 per cent for the quarter.
