Private equity in developed markets ahead of the curve, report finds

According to a new report, private equity investments in developed marketplaces far outperformed those made in emerging markets over the second part of last year.

The Cambridge Associates LLC Global ex US Developed Markets Private Equity and Venture Capital Index found that a far stronger Euro helped to boost the returns in the second quarter of 2015 in both private equity and venture capital funds. The research pertained to each of the sectors when investing mostly outside of the US market.

Cambridge Associates created the Global ex US Developed Markets Private Equity and Venture Capital Index using data from 765 global ex US developed markets private equity and venture capital funds formed between 1986 to 2015. The funds have a worth of around $256 billion. The organisation created the Emerging Markets Private Equity and Venture Capital Index using data from 553 emerging markets funds formed between 1986 and last year, with a value of about $159 billion.

The index reported that funds targeting developed markets for investment outperformed those funds targeting emerging markets. This result was turned on its head when it came to public market equities, the index found, as the sector saw greater returns from funds investing into emerging markets.

Indeed, the report from the global institutional investment advisor reported a return of 7.6 per cent for the second quarter of last year – ending 30 June, 2015 for its ex US developed markets private equity and venture capital. In contrast, its public market counterpart saw a rise of just 0.6 per cent over the same time period.

The index also reported that funds raised in years such as 2007, known as ‘vintage’ years, had a major impact on the overall figures, with the highest return, gaining 9.6 per cent over the time period. The vast majority of this return was accounted for by investments made in 2007 into asset classes such as consumer, information technology, manufacturing and financial services companies. In terms of a weaker year, funds raised in 2012 accounted for the lowest return of the group, just 5.2 per cent.

Overall, fund managers operating in the ex US developed markets index called $6.6 billion from their investors during the time period, which saw a rise of three per cent from the figures recorded in the first quarter of last year. The IT and financial services sectors both gained 13.2 per cent, taking first place for the highest returns. Returns ranged from 12.2 per cent for UK-based companies, which represented the largest region by weight, to 12 per cent for French companies, to 6.7 per cent for US-based firms, which saw the least benefit from the improving strength of the Euro. Overall, three of the five largest regions represented in the index saw double-digit gains over the time period.

In the emerging markets index, funds raised in 2011 saw the highest returns at 10.6 per cent. Funds raised in 2007 represented almost 25 per cent of the total index value for emerging markets, and saw a gain of 1.7 per cent. Those funds raised in another ‘vintage’ year – 2005 – saw a rise of 1.5 per cent, which was the lowest achieved by any of the vintage years. Fund managers working in the emerging markets index called $3.7 billion from their investors over the time period, which represented a rise of 10 per cent on previous quarter.

Andrea Auerbach, managing director and Head of Global Private Investment Research at Cambridge Associates, said: “Capital distributions jumped 49 per cent over Q1 to a total of $6.5 billion for the quarter. Even with such a robust number, however, total distributions for the first six months were down about five 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 single-handedly distributing almost $3 billion.”

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