First Half 2018 Highlights

• The developed ex US and emerging markets PE/VC indexes outperformed the comparable public equity index (MSCI EAFE and Emerging Markets Indexes), based on mPME returns, for all time periods ending June 30, 2018, listed in Figure 1.

• Based on market values at June 30, 2018, public companies accounted for nearly 7% of the developed markets PE/VC index and about 15% of the emerging markets PE/VC index.

Developed ex US Markets Private Equity and Venture Capital Performance Insights

Vintage Years

During the first six months of 2018, eight of the ten meaningfully sized vintage years (those that represented at least 5% of the index’s value) earned positive returns; the two exceptions were vintages 2010 and 2016. Combined, the ten vintages accounted for more than 93% of the benchmark’s value (Figure 2) and returns ranged from -2.5% (2010) to 11.9% (2007) for the two-quarter period. Write-ups for IT were by far the largest contributor to the 2007 vintage year’s strong return (with consumer staples a distant second). In the 2007 vintage, write-downs were concentrated in the consumer discretionary and industrial sectors. In the index’s largest vintage, 2012, write-ups were fairly widespread with IT and healthcare leading the way; write-downs were dominated by industrials.

Compared with the previous six-month period (July 2017 – December 2017), limited partner (LP) contribution and distribution amounts were both lower in first half 2018, more dramatically so for contributions than distributions. Developed markets PE/VC funds called $11.8 billion from investors, a 52% drop, and distributions totaled $29.6 billion, a 9% decline. Distributions continued to outpace contributions, a trend that began in 2011.

Managers of funds raised from 2012 to 2016 called $10.8 billion, or 91% of the total capital called during the first two quarters. Three of those vintages each called more than $2.0 billion (2012 and 2015–16), with the 2015 vintage calling nearly $4 billion. Five vintages, 2006–07 and 2011–13, each distributed at least $2.0 billion for a combined amount of $24.8 billion (84% of total distributions). The 2012 vintage year led the way, distributing almost $9 billion.

Sectors

Figure 3 shows the GICS sector breakdown of the Developed ex US Markets Private Equity and Venture Capital Index and a public market counterpart, the MSCI EAFE Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the relative overweights in the PE/VC index, such as consumer discretionary, IT, and healthcare, and the underweights in financials and consumer staples. It is worth noting that Standard & Poor’s redefined GICS sector classifications in September 2018 and, as a result, a large number of companies shifted from one sector to another, which will lead to different GICS sector breakdowns for both the public and private indexes in future analyses.

All seven meaningfully sized sectors earned positive returns for first half 2018 in both USD and euro terms, with performance in euros being the stronger of the two (Figure 4). Among the key sectors, IT earned the highest return and financials the lowest. No key vintage year suffered losses in the IT sector; the 2007 and 2012 vintages had the largest increases. The financials sector return was the lowest among the key components of the index, with muted write-ups in most vintages and write-downs in the 2006 group. The four largest sectors—consumer discretionary, IT, healthcare, and industrials (in rank order)—represented 77% of the index’s value and, on a USD-weighted basis, returned 8.7%.

Consumer (discretionary and staples combined), IT, healthcare, and industrials companies (in rank order) attracted almost 80% of the capital invested during first half 2018; consumer alone garnered about 30% (roughly two-thirds discretionary, one-third staples).

Countries

In USD terms, three of the seven meaningfully sized countries in the index (accounting for 72% of its value) posted double-digit positive returns during the first two quarters (Figure 5); as with the sectors, returns in EUR terms were higher, helping five of the large countries produce double-digit returns in EUR terms. Companies based in the Netherlands (a top performer in the second half of 2017) were the best performing, with two vintages, 2007 and 2013, contributing the most to returns. For German companies—the worst performers among the large countries—valuation fluctuations were minimal across the vintages, with some seeing small write-downs and some seeing small write-ups. For the six-month period, the gross dollar-weighted return for the three largest countries—the United States,^[2]Funds in the developed markets ex US PE/VC benchmark primarily invest in companies in Europe, but occasionally make investments in US companies as well. This is particularly true of “global” … Continue reading the United Kingdom, and Germany—was 8.8%, about 15 basis points higher than the index’s total gross return.

Companies in developed European countries attracted 86% of the capital invested during the first two quarters, about 8% higher than the long-term norm for the region. Businesses in the United States and developed Asia garnered about 11% of the capital invested, more than 6% shy of their long-term allocations (the United States accounted for the entire shortfall).

Emerging Markets Private Equity and Venture Capital Performance Insights

Vintage Years

During the first six months, there were eight vintage years (2007, 2008, 2010–15) that accounted for at least 5% of the emerging markets index’s value; combined, the eight represented 85% of the index’s value (Figure 6). All eight vintages produced positive returns for first half 2018, contributing to healthy year-to-date performance (6.0%). Performance among these vintages was quite varied, with returns ranging from 0.0% (2007) to 13.6% (2014).

Write-ups in IT were the main driver for the best-performing vintage, 2014. The lowest-returning vintage, 2007, was impacted by write-offs in most sectors, primarily financials, healthcare, and industrials, but offset by significant write-ups in IT. At the close of first half 2018, the largest vintage year was 2011, representing over 15% of the index. It posted a 7.0% return in the first half, despite being the only meaningfully sized vintage to post a negative return in the second quarter. Its write-ups were almost exclusively in IT and occurred in the first quarter.

During the first half, emerging markets PE/VC funds called $10.9 billion from investors, an almost 22% decrease from the prior six month period but slightly above the ten-year semi-annual average of $9.4 billion. Managers distributed just over $11.4 billion year-to-date, which represented a 30% decrease from the prior six-month period. Even so, the amount distributed was the fifth largest sum for any six-month period since the inception of the index in 1986—all five occurred in the past four years. Since 1986, distributions have outpaced contributions in slightly more than 15% of the semi-annual periods, but in the past five years they have outpaced contributions in 60% of the semi-annual periods.

Managers of funds that were raised in 2014–16 called the majority of capital in first half 2018, totaling over $7.5 billion and about 70% of all capital called year-to-date. These three vintages, in the heart of their investment periods, called more than $2.3 billion each. On the distributions front, managers in five vintage years (2007–08 and 2010–12) returned at least $1.0 billion to LPs, for a combined total of $8.0 billion, or 70% of the period’s total. Managers with 2007 vintage funds, the oldest vintage of those meaningfully sized, returned the most capital, topping $2.1 billion for first half 2018.

Sectors

Figure 7 shows the GICS sector breakdown of the Emerging Markets PE/VC Index and a public market counterpart, the MSCI Emerging Markets Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the relative overweights in the PE/VC index, such as consumer discretionary, healthcare, and industrials, and the underweights in financials, energy, and materials. As mentioned previously, Standard & Poor’s redefined GICS sector classifications in September 2018 and, as a result, a large number of companies shifted from one sector to another, which will lead to different GICS sector breakdowns for both the public and private indexes in future analyses.

Five of the six meaningfully sized sectors posted positive first half returns (Figure 8). IT was a runaway leader, returning 21.3% for the period, which represented a marked change from the prior year when IT returned 8.3% in the first half and 13.4% in the second half. In first half 2018, just shy of 80% of the IT write-ups were attributed to investments made by funds formed in 2008, 2010–11, and 2014–15; 2011 vintage funds saw the most appreciation. Returns for the other five sectors were between -2.5% (industrials) and 7.7% (healthcare). On a gross, dollar-weighted basis, the three largest sectors by market value—IT, consumer discretionary, and healthcare—returned 12.0% during the first half, outperforming the return for all companies by over 4.5 percentage points (ppts).

Compared with second half 2017, the investment pace in this period was slightly slower (a decrease of about 12%). Companies across four sectors (in rank order: IT, consumer discretionary, healthcare, and industrials) garnered 80% of the capital invested in the first six months of 2018, with consumer discretionary and IT alone attracting over 50% of all capital. Over the long term, managers in the emerging markets index have allocated 63% of their capital to these four sectors, with IT accounting for the biggest difference between the current six months (28%) and the long-term norm (17%).

Countries

Highlighting the index’s geographic concentration, China remains, by far, the largest country component of the index (Figure 9). India and South Korea continue as constituents in the meaningfully sized group, and the United States is a new addition in 2018, composing 5.5% of the index.^[3]Funds in the emerging markets PE/VC benchmark occasionally invest in companies in developed markets regions, as well as the emerging markets regions Five other countries—Australia, Brazil, Hong Kong, Japan, and Singapore—represented between 2.1% and 3.3% of the index.

China-based companies again received more capital than any other country, 31% of invested capital. Surprisingly, the United States received the second highest amount of capital year-to-date, roughly 17% of all invested capital, and about 10% more than the long-term average.

On a gross dollar-weighted basis, when combined, companies based in China, India, South Korea, and the United States returned nearly 10.2%, almost 3 ppts more than the full index in first half 2018.

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Caryn Slotsky, Senior Investment Director
Jacob Gilfix, Senior Investment Associate
Sarah Grifferty, Investment Associate