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Private equity in developed markets outperformed emerging market PE investments in Q2 2015

A stronger euro helped boost second quarter 2015 returns as measured in US dollars in private equity and venture capital funds investing primarily outside the US. Funds focusing on ex US developed markets outperformed those targeting emerging markets – a result that was the reverse of the outcome for public market equities, according to Cambridge Associates.

The Cambridge Associates LLC Global ex US Developed Markets Private Equity and Venture Capital Index returned 7.6 per cent for the quarter ending 30 June, 2015, as measured in US dollars. Its public market counterpart, the MSCI EAFE, rose just 0.6 per cent over the same period. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index posted a 4.4 per cent gain for the quarter. Its counterpart, the MSCI Emerging Markets index, rose 0.8 per cent.
 
Seven vintages in the ex US developed markets index represented at least 5 per cent of the index (ie, were "meaningfully sized"), and all had positive returns in Q2. Funds raised in the largest vintage year, 2007, had the greatest impact on the index because they also had the highest return of the largest vintages, gaining 9.6 per cent. Write-ups on investments in consumer, information technology (IT), manufacturing and financial services companies accounted for the bulk of that vintage's performance. Funds raised in 2012 had the lowest return of the group: 5.2 per cent.
 
Fund managers in the ex US developed markets index called USD6.6 billion from their investors during the quarter, which represented a 3 per cent increase from Q1. Seventy-two percent came from investors in funds raised in 2011-2013. Fund managers in the index distributed USD16.9 billion, a 5 per cent increase over Q1, with USD5.4 billion of the total going to investors in the 2006 vintage.
 
The seven meaningfully-sized sectors in the global developed markets index had positive returns in Q2, with two of them tying for the highest return: IT and financial services, which both gained 13.2 per cent. Among the other five sectors, returns ranged from a low of 8.5 per cent for media to a high of 10.4 per cent for software. Consumer, perennially the largest sector, gained 9.6 per cent and represented almost 23 per cent of the index by weight.
 
Returns among the five largest regions in the index ranged from a high of 12.2 per cent for companies in the UK (the largest region by weight) to a low of 6.7 per cent for companies based in the US, which benefited the least in the group from the stabilising euro. French companies ran a close second, earning 12.0 per cent for the period.
 
As in the ex US global index, all of the meaningfully-sized vintages in the emerging markets index had positive returns for the quarter. Of the seven vintage years in that group, funds raised in 2011 had the highest return: 10.6 per cent. The largest vintage year, 2007, represented almost a quarter of the index's value and gained 1.7 per cent. Just behind were funds raised in 2005, which rose 1.5 per cent for the period, the poorest performance of the large vintages.
 
Fund managers in the emerging markets index called USD3.7 billion from their investors in Q2, a 10 per cent increase over the prior quarter. However, for the first half of the year calls were down 27 per cent from the same six-month period in 2014.
 
"Capital distributions jumped 49 per cent over Q1 to a total of USD6.5 billion for the quarter. Even with such a robust number, however, total distributions for the first six months were down about 5 per cent from the same period in 2014. Fund managers in the 2006 and 2007 vintage distributed about two-thirds of the total, with the latter singlehandedly distributing almost USD3 billion," says Andrea Auerbach, Managing Director and Head of Global Private Investment Research at Cambridge Associates.
 
All six significantly-sized sectors in the emerging markets index had positive returns in Q2. Manufacturing led the way with a 9.6 per cent gain, followed by health care, which returned 7.5 per cent. Financial services rose just 1.9 per cent, making it the poorest performer of the group. Consumer companies represented about 21 per cent of the emerging markets index and gained 4.9 per cent.
 
China and India have historically dominated the emerging markets index, with China by far the more significant of the two in terms of weight in the index. While this remained true in Q2, South Korea joined China and India as a significant presence in the index, representing 5.2 per cent of the index's weight at the end of the quarter. South Korean companies gained 8.4 per cent, the best performance of the three top-sized regions. Companies in China represented 45.6 per cent of the index and earned 7.8 per cent for the period. India was the only country of the group to post a negative return, falling 1.5 per cent.

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