December, 2011 marked the end of a solid year for US private equity and venture capital investments, according to Cambridge Associates LLC.
Both private asset classes rebounded from negative third quarters to generate positive returns in the final quarter. Both also generated double-digit returns for the 12-month period, placing their performances well ahead of their public equity counterparts in what was a stormy year for the markets and the broader economy.
The Cambridge Associates LLC U.S. Private Equity Index returned 5.3% in the final quarter, beating out the 1.4% showing of the Cambridge Associates LLC U.S. Venture Capital Index(R); both, however, significantly underperformed public equities during the period, as can be seen in the table below. For the calendar year the situation was reversed: Venture capital out-earned private equity, 13.2% versus 10.9 %, respectively. For comparison, the NASDAQ Composite returned -1.8% in 2011; the S&P 500 returned 2.1%.
The following table details the performance of the Cambridge benchmarks against several key market indices. Returns for periods of one year and longer are annualised.
With the exception of the fourth quarter, the private equity index beat out the performance of large public companies in the S&P 500 in every time period indicated in the preceding table. The results of the venture capital index were more mixed vis-a-vis the public markets: for example, the venture index underperformed the Russell 2000 Composite for the three- and ten-year marks, as well as the fourth quarter, but it significantly bested that index over the other time horizons shown. The venture index was also the top performer of all indices shown for the longer-term 15-, 20-, and 25-year horizons.
The ten-year return for the private equity index at the end of the fourth quarter was 12.0%; for the venture capital index it was a modest 3.3%. Nevertheless, the venture capital return for this period overtook the S&P 500’s, which was 2.9%. The ten-year venture capital return has risen nearly 8% since its nadir of -4.6%, which occurred during the third quarter of 2010.
The spread between private equity and venture capital returns decreased again for the ten-year mark, though only slightly, from 8.9% to 8.7%. For comparison, the peak spread for ten-year returns came at the end of the third quarter of 2010, when it was at 12.7%.
Capital Calls and Distributions Rose in Private Equity and Fell in Venture Capital in the Fourth Quarter; At USD93.6 Billion, Private Equity Distributions in 2011 Were Largest in the History of the Index
Private equity fund managers called about USD26.0 billion from their limited partners in the fourth quarter, a 31.8% increase over the prior quarter. Fund managers distributed just over USD26.7 billion to their LPs, a 48.8% increase and the third largest quarterly distribution in the 26 years since Cambridge Associates began tracking the private equity industry. Investors in funds launched in 2000 and 2004 – 2008 received the bulk of the distributions: approximately 89% or USD22.7 billion. Limited partners of funds launched in 2006 – 2008 bore the brunt of capital calls during the period, contributing 79% or USD20.4 billion of the total.
For the year, private equity fund managers called roughly the same amount of capital from their LPs as they did in 2010: USD77.5 billion. This marked the third highest level of capital contributions in private equity in a calendar year since the index’s inception in 1986. And for the first time since 2005, distributions of capital exceeded contributions: limited partners in 2011 received USD93.6 billion from their fund managers, the largest annual amount in the history of the index and a 30% increase over distributions in 2010.
"2011 delivered a near record high in capital calls from LPs at more than USD77 billion, but more importantly, a 25-year high in distributions to LPs, at nearly USD94 billion; both are notable," says Andrea Auerbach (pictured), Managing Director and Head of Private Investment Research at Cambridge Associates. "The capital calls, particularly from the 2006 and 2007 vintage years, combined with a more moderate fundraising environment in recent years, should help to whittle away at the capital overhang of dollars committed but not yet invested. The record distributions likely reflect the long-awaited completion of realisation events delayed largely due to the recession and buoyed by active M&A and IPO environments in 2011."
Capital calls and distributions for venture capital funds were both down for the fourth quarter, but they were both up for the year. Fund managers called just under USD3.4 billion, a 14.7% decrease from the third quarter; during the same period, they distributed USD3.4 billion, a 4.0% drop. For calendar 2011, contributions were up 10.2% over 2010 to just under USD15.2 billion. Distributions during the same period increased 14.2% over the prior year to just over USD15.2 billion, ranking 2011’s distributions the fourth highest annual total in the history of the venture capital index.
Of the eight meaningfully-sized sectors in the private equity index, only one, software, failed to produce positive results in the fourth quarter. The best performer of this group was financial services, which earned 7.9% for the period. The three largest sectors – consumer, energy, and healthcare – comprised nearly 51% of the index’s total value. Of the three, energy performed best, returning 7.4%.
For the year, all eight sectors produced positive returns and all but one, financial services, were in the double digits. Despite its negative fourth quarter, software led the pack in 2011 with an annual return of 17.9%. Software was followed by information technology (IT), at 17.2%, and media at 15.9%. Software’s leadership for the year was driven by the strong performance of that sector in the 2005, 2007 and 2000 vintages.
VC Index Dominated by IT, Healthcare, and Software; Software and IT Post Impressive 2011 Returns
The venture capital index continued to be highly concentrated by sector in the fourth quarter, with three sectors – IT, healthcare, and software – comprising more than 75% of the index’s value. Companies in these sectors also attracted more than 75% of the capital investments during the period. Software was the best performer during the quarter, yielding a 7.7% return, while among all sectors energy was, at -2.8%, the worst.
For the year, IT and software turned in dominating performances, far outpacing all other sectors in the index. IT generated a 32.8% return and software a 27.3% return for the period. Energy companies were the worst performers for both the fourth quarter and the year.
"Venture capital generated its second consecutive year of strong performance in 2011, due primarily to returns posted in the first two quarters of the year," says Theresa Sorrentino Hajer, Managing Director and Venture Capital Research Consultant at Cambridge Associates. "The active M&A environment and healthier IPO market helped drive realisations and boost unrealised valuations."
