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US venture capital returns strengthened in Q3 2017

The performance of venture capital managers ticked up in the third quarter of 2017, emerging from the second quarter when a slow exit environment and mixed IPO performance dented returns, according to figures published today by Cambridge Associates.

The Cambridge Associates LLC US Venture Capital Index returned 3.2 per cent in Q3 2017 – up from the 1.4 per cent posted in Q2. But, even with this strengthening performance, the US Venture Capital Index underperformed the Russell 2000 and S&P 500, as well as a third comparable public market index: the Nasdaq, which tracks tech stocks and returned 6.1 per cent for the quarter. Over time periods of 20 years or more the index outperformed those tracking the public markets.
 
The key to the boost in the third quarter was the fact that nine of the ten “meaningfully sized” vintage years – those funds that each represented at least 5 per cent of the index’s value – achieved positive results. Four of the large vintages – 2010, 2011, 2013, and 2014 – saw returns exceeding 5 per cent. Only one vintage – 2008 – posted a negative return: -0.9 per cent. By contrast, in the second quarter, only two of the meaningfully sized vintages had posted returns greater than 3 per cent.
 
Another reason for the stronger performance was that two of the three largest sectors in the Cambridge Associates US Venture Capital Index achieved strongly positive returns in the quarter. Health care, which accounted for 25 per cent of the index, extended its positive run with a third consecutive quarter of delivering the best performance, posting a 6 per cent return. Meanwhile, consumer discretionary, accounting for 8 per cent of the index, recorded a return of 5.7 per cent.
 
But simply being in a particular sector was not a guarantee of success – or failure. The IT sector, which accounted for over half the value of the index, posted a 1.9 per cent return. Yet, IT companies were a primary driver of improved performance for the best performing vintage, 2011, whose funds recorded an 8.1 per cent return, and the largest vintage, 2014, whose funds recorded a 5.1 per cent return. By contrast, although the 2014 group of funds saw significant write-ups in health care, the 2008 group of funds, which turned in the worst performance for the quarter, actually suffered because of their selection of health care companies.
 
“It is encouraging to see that venture capital funds enjoyed something of a recovery in the third quarter of 2017,” says Theresa Hajer, Managing Director and co-head of US Venture Capital Research at Cambridge Associates. “Technology is transforming a broad swath of industries, and venture capital funds provide direct exposure to innovative and emerging technology companies. But it remains the case that these funds are for long-term investors who can afford to be patient. For those who have a long time horizon, the rewards can be significant. Hence our continued focus on potential VC investments, and on informed manager selection.”

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