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Private equity and venture capital returns improve in Q3 2009

Private equity and venture capital recovered some of the losses they had incurred in 2008 and early 2009 in the third quarter, with each asset class logging its best performance since 2007.

However, as in the previous quarter, public equity indices outperformed both, though for time horizons of three years and longer private equity and venture capital returns continued to be significantly better than those of public equities, according to Cambridge Associates, a provider of research and investment advice to institutional investors and private clients.

As measured by the Cambridge Associates’ Private Equity index, private equity returned 6.2 per cent for last year’s third quarter, marking that asset class’ best performance since the second quarter of 2007.

Venture capital in Q3, as measured by Cambridge Associates’ Venture Capital index, showed its best results since the end of 2007, earning 2.3 per cent.

Private equity and venture-backed companies both benefited from market-based valuation methodologies which, in Q3’s climate of rising public markets, led to increases in private company valuations.

Private equity and venture funds each invested more in Q3 than in either of the two prior quarters, and contributions continued to outpace distributions. Exit opportunities were once again limited for both investment classes.

While private equity significantly outperformed venture capital for the quarter, PE and VC earned virtually identical returns (8.3 per cent and 8.4 per cent, respectively) for the ten-year period ending 30 September 2009. For the 20-year period ending on the same date, however, returns for venture capital were almost twice those for private equity – a gain of 23.1 per cent versus 11.8 per cent, respectively – as measured by the Cambridge Associates’ indices.

The following tables provide comparative returns for private equity and venture capital, based on Cambridge Associates’ indices, vis-à-vis several key indices of public market equities.

"The PE benchmark’s performance for Q3 was largely due to improved valuations for funds raised from 2000 to 2007. With just a single exception, each of these vintage years saw the value of its assets increase by at least USD1.0bn during the quarter. The largest vintage year in the index, 2006, generated a quarterly return of 6.4 per cent, driven mostly by increased valuations for retail, media, and healthcare investments," says Andrea Auerbach, managing director and private equity research consultant at Cambridge Associates.

Each of the eight industry sectors which collectively comprised 90 per cent of the PE index’s value earned a positive return for Q3. Of the eight, financial services generated the largest return, 11.9 per cent. Healthcare, which earned an 8.5 per cent return, was the best performer of the top three industries by size. Healthcare, combined with the other top two sectors by size, consumer and energy, accounted for more than half of the PE benchmark’s value.

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