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PE and VC funds post fifth consecutive quarter of positive returns

The quarter ending 30 June 2010 marked the continuation of a five-quarter trend of positive returns in private equity and venture capital funds, according to Cambridge Associates, a provider of research and investment advice to institutional investors and private clients.

Earnings in both types of funds were down from the prior quarter, however, marking the third consecutive quarter-to-quarter decline for these alternative assets.

Private equity outperformed venture capital during the second quarter. Both earned better returns during the period than the major public market indices, which suffered their first negative quarter in a year. Funds in the private equity index returned 1.6 per cent in the second quarter, down from 4.4 per cent in the first quarter; funds in the VC index earned 0.4 per cent, compared to 0.7 per cent in the previous quarter.

By comparison, the Dow Jones Industrial Average lost 9.4 per cent in value during the second quarter, while the Nasdaq Composite index fell 12.0 per cent.

Private equity and venture capital funds also both generated positive returns for the first half of 2010, as measured by Cambridge Associates’ benchmark indices, in contrast with the major public market indices, which were negative for the first half. The private equity index returned 5.8 per cent for the first two quarters; the venture capital index returned 1.0 per cent. The Dow Jones Industrial Average and Nasdaq Composite indices lost 5.0 per cent and 7.0 per cent, respectively, over the same period.

The best returns during the second quarter among top-size vintage years in both the private equity and venture capital indices were generated by funds raised in 2004.
Increased valuations in manufacturing, healthcare, IT, software and media investments drove the quarterly performance of that year’s private equity funds, which returned 3.7 per cent; for venture capital, the chief driver was higher valuations for IT companies. Venture capital funds from 2004 earned 4.9 per cent for the quarter.

Managers of private equity and venture capital funds called and distributed more capital in the quarter ending 30 June than they did in the prior quarter. Fund managers in the private equity index distributed more capital in the first half of 2010 – just over USD13bn – than they did in all of 2009. This represented a 43.0 per cent increase over the prior quarter and the largest quarterly distribution total since the fourth quarter of 2007. Fund managers issued a little more than USD19bn worth of capital calls during the second quarter, a 71.0 per cent increase in contributions over the first quarter.

Almost half of the money invested by private equity funds in the index during the second quarter went into consumer and energy businesses – about 10.0 per cent more than the long term averages for those sectors.

Seven of the eight key sectors (i.e. those representing at least 5.0 per cent of the value of the index) in the private equity index had positive returns for the second quarter, with software the top performer, earning 5.6 per cent. Energy was the only sector from this group that generated a negative return, earning -0.6 per cent for the period.
Andrea Auerbach, managing director and head of US private equity research at Cambridge Associates, says: "It was encouraging to see such a meaningful increase in private equity fund distributions along with the breadth of positive returns among the key sectors in our PE benchmark index. There has also been an increase in the volume of capital calls, reflecting the market’s continued return to a more transactional state, further buoyed by the increased availability of leverage."

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