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Private equity and venture capital outperformed public markets in 2015

Monday, July 18, 2016
Opalesque Industry Update - US private equity and venture capital funds posted higher returns for 2015 than the public markets, though they underperformed in the final quarter of the year, according to investment advisor Cambridge Associates. US PE and VC funds continued a two-year downward trend, returning less to investors in 2015 than they had in 2013 or 2014. Energy companies dampened returns for PE funds, as they did last year.

The Cambridge Associates LLC US Private Equity Index® rose 0.5% and 5.9% for the quarter and year ending December 31, 2015. The Cambridge Associates LLC US Venture Capital Index® increased 1.6% and 12.9%, respectively, over the same periods. For comparison, for the fourth quarter and annual returns for the S&P 500 in 2015 were 7.0% and 1.4%. While energy companies held down returns for the PE Index, as they did in 2014, the annual returns of both Cambridge benchmarks were helped by the strong performances of companies in three large sectors: healthcare, software and IT.

Cambridge Associates derives its US PE and VC Indexes from the financial information contained in its proprietary database of 1,251 US PE and 1,619 US VC funds, with a combined value of roughly $781 billion.

Private equity insights

"Despite a somewhat muted environment for initial public offerings and merger & acquisition activity, and the fallout from energy companies' weak performance, PE funds still bested public markets over the course of 2015. The year also marked the fourth consecutive year in which over $100 billion was returned to investors in the benchmark," said Keirsten Lawton, co-head of US Private Equity Research, Cambridge Associates.

The PE Index returned far less (5.9%) in 2015 than in the previous two years, when the index earned double-digit returns.

Seven vintage years -- 2005-09, 2011 and 2012 -- represented 81% of the Cambridge PE Index in the fourth quarter, and returns for all but one of these vintages were flat or modestly positive. Returns among these key vintages ranged from -1.6% for the 2008 funds to 3.6% for the 2009 funds. For the quarter and year's best-performing vintage, 2009, gains in healthcare and consumer companies surpassed losses in financial services.

All but two of the meaningfully sized sectors -- i.e., those representing at least 5% of the PE Index -- produced positive returns in 4Q 2015. The quarter's negative sectors were energy and financial services; IT posted the highest return for the quarter. For the second year in a row, healthcare and energy were the best- and worst-performing sectors in the PE Index, earning 29.2% and -20.1%, respectively. Other than healthcare, three sectors posted double-digit returns: software, IT and consumer.

Distributions and contributions fell from 2014 levels, which were record-breaking. In the fourth quarter, managers called $23.7 billion from PE limited partners and returned $36.7 billion, representing increases from the third quarter 2015. During all of 2015, managers in the PE Index called $78.3 billion from and returned $140.6 billion to investors, declines of $9.0 billion and $17.8 billion, respectively. Both periods saw GPs return approximately $1.80 for every $1.00 contributed back to investors, a pacing that continues to reflect significant net capital back to limited partners.

Venture capital insights

"The VC Index's performance last year (12.9%) significantly outpaced the S&P 500 and Russell 2000 indexes (1.4% and -4.4%, respectively). Venture capital remains a strong long-term return driver for institutional investors, having outperformed public markets over the last five, 10 and 20 years. 2015 was the fourth consecutive year when distributions to investors were higher than contributions to managers, meaning investors who have mature venture programs have been rewarded, whereas investors with younger portfolios were less likely to reap these cash flows and more likely to show 'paper gains' over this period," said Theresa Sorrentino Hajer, Managing Director, Private Growth Research, Cambridge Associates.

In 2015, six of the VC Index's eight meaningfully sized vintage years posted double-digit returns, and vintages 2011 and 2012 tied for the year's best performance: 25.7%. Vintage years 2010 and 2012, which together accounted for 22% of the index, were the largest positive contributors to the VC index's performance in 2015.

The three largest sectors -- IT, healthcare and software -- accounted for almost 82% of the index's value. About 86% of VC Index capital invested in the fourth quarter went to companies in these sectors. Healthcare was the sector with the highest quarter and annual returns -- 6.1% and 25.6%, respectively. The other two highest-performing sectors during 2015 were software (13.7%) and IT (11.2%).

In the fourth quarter 2015, managers in the US VC Index called $3.3 billion from investors -- a drop of 15.1% from the third quarter. Fourth quarter distributions totaled $7.1 billion, 43.1% higher than the previous quarter. US VC Index managers called $15.3 billion over the course of 2015, a drop of 7.5%. VC Index distributions fell 12.3% to $28.0 billion. Nevertheless, 2015 saw the third-highest annual distribution level of all time, behind only 2014 ($32 billion) and the bubble year of 2000 ($57 billion).

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