Private equity and venture capital funds based in the US kicked off the first quarter of 2013 with positive, single-digit returns that were higher than the previous period.
In the midst of a strong first quarter for public equities, however, both alternative asset classes underperformed the public markets, according to benchmark indices published by Cambridge Associates.
The Cambridge Associates LLC US Private Equity Index rose 4.5 per cent for the period ending 31 March 2013, which was a 1.0 per cent improvement over its performance the prior quarter. For comparison, the S&P 500 index rose 10.6 per cent in the first quarter. The Cambridge Associates LLC US Venture Capital Index more than doubled its prior period results by earning 2.5 per cent in the first quarter. For comparison, the Russell 2000 Composite, the small company index, rose 12.4 per cent in the same period.
The private equity benchmark earned positive returns in three of the four quarters comprising the 12-month period that ended on March 31; the venture capital benchmark was positive in all four quarters. By way of comparison, public market returns were negative in two of the four quarters covering the same period.
At the end of the first quarter, public companies accounted for nearly 18 per cent of the private index’s value and about 12.5 per cent of the venture capital index’s value.
In the first quarter, every vintage year from 1992 through 2012 was positive. This included the five largest vintages (vintage years 2004 to 2008), each of which represented at least five per cent of the benchmark’s value.
Funds raised in 2005 were the top performers of the five largest vintages, earning 6.1 per cent for the quarter. The 2008 funds brought up the rear, returning 3.4 per cent. The largest vintage in the index, the 2007 funds, which accounted for 27.5 per cent of the benchmark’s value, rose 4.7 per cent, as did the second largest vintage, the 2006 funds, which represented 22.1 per cent of the index. Write-ups in energy and healthcare companies drove the 2007 vintage’s performance.
"In the first quarter, fund managers in our private equity index called the lowest amount of capital from their limited partners since the third quarter of 2009 – contributions were about USD12.6bn, which was a 50.1 per cent drop from the final quarter of 2012. Distributions to LPs were also down, dropping 39.3 per cent from Q4 to USD29.6bn in the first quarter. However, Q1 was the eighth out of the last nine quarters in which distributions outpaced contributions," says Keirsten Lawton, senior consultant, private equity research at Cambridge Associates.
Funds raised in 2007 called the most capital of any vintage in the index, a total of USD5.0bn, while funds in the 2006 vintage led the way in capital returns, distributing USD6.5bn to their LPs during the quarter.
There were eight sectors in the PE index that represented at least five per cent of the benchmark’s value. All eight had positive returns in the first quarter. Financial services led the way, rising 6.6 per cent. Manufacturing, which had the second best performance of the significantly sized sectors, rose 5.4 per cent. The largest sector, consumer, rose 3.9 per cent; the second largest, energy, gained 4.5 per cent. Software, which turned in the lowest quarterly performance of the eight largest sectors, gained 2.9 per cent.
Fund managers in the PE index poured 39 per cent of all the capital that they invested during the quarter into energy companies.
Similar to the PE index, all seven of the largest vintage years in the venture capital index had positive returns in the first quarter. The spread between the best performing funds, those raised in 2008, and the poorest performing group, the 2004 vintage, was just 2.6 per cent. The 2008 vintage year funds, the third largest in the index by weight, rose 4.2 per cent. Funds raised in 2006, the largest vintage in the index, earned 2.8 per cent. Higher valuations for healthcare and IT companies were the primary drivers of the 2006 vintage’s performance.
Also as in the PE index, capital distributions in the VC benchmark once again surpassed contributions. Both contributions and distributions declined from the previous quarter.
Fund managers in the VC index called just under USD2.9bn from their limited partners, a 16.9 per cent decrease from last year’s fourth quarter, and they returned USD3.4bn, a drop of 45.1 per cent. The first quarter was the fifth quarter in a row in which capital distributions surpassed contributions. Funds formed in 2007, 2008, 2010, and 2012 were responsible for 68.4 per cent of the total capital called during the quarter. Vintage years 2000, 2006, and 2007 accounted for 58.6 per cent of the quarter’s total capital distributions.
"Value in the venture capital index remained tightly concentrated by sector, with just three sectors — IT, healthcare, and software — comprising more than three-quarter’s (75.9 per cent) of the index. Of these, the largest, IT, which accounted for 32.0 per cent of the benchmark, gained 3.9 per cent for the quarter. The next two, healthcare and software, returned 4.5 per cent and 4.9 per cent, respectively; two-thirds of the realisations for the quarter came from these two sectors. Write-ups in the software sector, which were fairly widespread across the index, also helped to boost performance," says Theresa Sorrentino Hajer, managing director, venture capital research at Cambridge Associates.
IT and software companies together attracted 63.0 per cent of the total capital that venture capital fund managers in the index invested during the first quarter, a slight drop from the long-term average for the two sectors. Two-thirds of the VC benchmark’s realisations during the first quarter came from software and healthcare companies.
