Returns on US private equity and venture capital funds remained positive in the quarter ending 30 September, 2014, though both were down from their second-quarter results.
Venture capital, benefitting from a healthy IPO market, outperformed private equity in the third quarter, while both outpaced key public market indices, according to benchmarks published by Cambridge Associates LLC tracking these alternative asset classes.
The Cambridge Associates LLC US Private Equity Index® rose 1.7% in Q3 and 10.2% year-to-date (YTD). Over the same periods, the Cambridge Associates LLC US Venture Capital Index® climbed 2.4% and 10.8%. For comparison, the S&P 500 was up 1.1% and 8.3% for the quarter and YTD, respectively. Q3 marked the ninth consecutive quarter of positive re
Out of the seven sectors in Q3 that represented at least 5% of the PE index, only energy turned in a negative performance, though two more, manufacturing and software, each rose less than 1.0%. Health care led the way returning 5.5% for the period, with write-ups on health care companies in the 2007 vintage year accounting for the bulk of the gain.
Energy fell modestly – 0.8% – from the previous quarter. The principal cause of the sector's drop in Q3 was write-downs in the 2001, 2005, 2006, and 2010 vintages.
"Fund managers were less aggressive in calling up capital from their LPs [limited partners] in the third quarter than they were in the second," says Keirsten Lawton, Managing Director and Co-Head of US Private Equity Research at Cambridge Associates. "Total calls dropped nearly 18% to USD19.6 billion. Distributions were down 6.2%, but at USD35.9 billion, they still heavily outnumbered contributions and made Q3 the 11th consecutive quarter in which distributions ran ahead of contributions."
Contributions and distributions for the first three quarters of 2014 were USD61.2 billion and USD111.8 billion, respectively, both well ahead of the same period in 2013, when contributions were USD40 billion and distributions were USD90 billion.
On 30 September, there were six vintage years in the PE index that represented at least 5% of the benchmark's value and all had positive returns for the quarter. Funds raised in 2012 led the way earning 5.4% for the third period. The largest vintage year by weight, 2007, returned 2.0%. The 2005 and 2006 vintages had the lowest returns: 0.6% and 0.7%, respectively.
The venture capital index was dominated by three sectors that comprised almost 80% of the benchmark's value: information technology (IT), health care, and software. No other sector in the benchmark during Q3 represented 5% or more of the index's value.
Software topped the three largest sectors in terms of performance with a gain of 6.2% for the quarter. It was followed by IT – the largest sector by weight, representing more than one-third of the index – which returned 3.9%. Health care, the third largest sector, returned 1.7% for the quarter.
VC Calls Fell While Distributions Increased and Continued to Outstrip Contributions
Paralleling the same phenomenon in the private equity benchmark, fund managers in the venture capital index continued to distribute more capital than they called during the third period. But unlike the PE index, distributions in Q3 increased from their level in Q2.
"Fund managers in the VC index continued to generate strong liquidity for LPs in Q3," says Peter Mooradian, Managing Director, Private Growth Research at Cambridge Associates. "Distributions rebounded from a modest decline in the second quarter, and overtook Q1 2014 as the highest quarterly level of distributions since the last quarter of 2000. Further, distributions outpaced contributions for the eleventh quarter in a row. Over that nearly three year period, managers distributed USD1.73 for every dollar called."
During Q3 fund managers in the VC index called USD3.2 billion from their investors and distributed USD7.8 billion, representing an 18.7% decrease in calls and a 12.5% increase in distributions over the prior period.
While the VC index was dominated by just three sectors in Q3, the same could not be said of weight distribution by vintage year. There were nine vintage years that represented 5% or more of the index's value, and quarterly returns among them varied widely. Returns for all four of the oldest vintage years in the group of nine (vintages 2000, 2004, 2005, and 2006) were negative, while returns for the five newer vintages (2007, 2008, 2010, 2011, and 2012) were positive.
Among the nine largest vintages, funds raised in 2010 easily led the pack with a return of 12.0% for the period, due primarily to write-ups on investments in software companies. Funds raised in 2000 returned -1.2%, the lowest quarterly return among the top-sized vintages. While the 2000 vintage year funds had gains in IT and consumer investments, these were more than offset by write-downs on companies in software and other smaller sectors.
