First Half 2018 Highlights

• As of June 30, 2018, the private equity benchmark had outperformed the public indexes in all time periods. The venture capital index had mixed success against the various public market indexes, consistently outperforming only in the longest time periods listed in the table.

• Public companies accounted for nearly 13% of the private equity index and almost 11% of the venture capital index. Non-US company exposures in the private equity and venture capital indexes have remained fairly steady, sitting at roughly 18% in the private equity benchmark and close to 10% in the venture capital benchmark as of June 30, 2018.

US Private Equity Performance Insights

Vintage Years

As of June 2018, eight vintage years were meaningfully sized—representing at least 5% of the benchmark’s value—and, combined, accounted for 83% of the index’s value. Six-month returns among the meaningfully sized vintages ranged from 6.1% for vintage year 2016 to 14.4% for vintage year 2014 (Figure 2). Two other vintage years, 2008 and 2009, represented between 4.1% and 4.6% of the benchmark and their returns fell within the range of their larger peers. Despite its “age,” the 2007 vintage year remained the largest component of the index.

Reflecting the sector weighting in many of the largest vintages, IT was by far the largest contributor to the valuation increases in the 2014 and 2016 vintages. In each case, IT accounted for nearly 70% of the valuation increases. Write-ups were more widespread in the top-sized 2007 vintage, with IT, industrials, financials, and consumer discretionary posting significant gains.

During the first six months of the year, fund managers called $39.4 billion, a 19% decrease from the previous six months. Limited partner (LP) distributions equaled $60.3 billion, a 21% decline from the six months ending December 2017. Most of these declines can be attributed to first quarter activity, which showed a significant drop off from fourth quarter 2017. In both first quarter 2018 and second quarter 2018, the industry continued to distribute more capital than it called.

Seven vintage years (2011–17) each called more than $2 billion in first half 2018, led by vintages 2014–16, which called a combined $26.2 billion; the 2015 vintage called the most capital ($10.7 billion). Ten vintage years (2005–14) each returned $2 billion or more, for a total of almost $57 billion. Just three of those vintages—2006, 2007, and 2011—combined to distribute almost $30 billion, or nearly half of the total distributed during the period.

Sectors

Figure 3 shows the GICS sector breakdown of the private equity index and a public market counterpart, the Russell 2000® Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the private equity index’s relative overweights in IT and consumer discretionary, and the underweight in financials. It is worth noting that the S&P 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.

As of June 2018, there were five meaningfully sized sectors. Six-month returns among the large sectors ranged from 8.5% (consumer discretionary) to 16.4% (IT) (Figure 4). Write-ups for IT companies were widespread and led by the 2014 vintage. IT performance was also strong in the public markets. In the consumer discretionary sector, write-downs in vintages 2004–06 were outnumbered by gains in most other vintages, led by 2012, 2007, and 2011 (in rank order).

IT (42%), industrials (14%), consumer discretionary (13%), and healthcare (10%) companies attracted 79% of all invested capital during first half 2018, which is about 7 ppts higher than the average invested in these sectors over the long term. Driving the difference is the percentage of capital allocated to IT, which historically was about 22% of invested capital.

US Venture Capital Performance Insights

Vintage Years

Venture managers returned 10.2% for the first six months of 2018 with all meaningfully sized vintage years, 2006–08 and 2010–16, earning positive returns for the period (Figure 5). Six of the ten large vintages—2006, 2010, 2012–13, and 2015–16—posted double-digit returns. First half 2018 performance was much higher than that of the last six months of 2017, when the benchmark returned 6.4% for the period.

Similar to private equity, IT company valuation changes were the primary drivers of the semi-annual returns for the best- and worst-performing vintage years, as well as the largest vintages. The best-performing vintage, 2016, enjoyed significant write-ups in IT and healthcare, and the lowest performer, 2008, experienced 86% of its net appreciation change from IT. For the 2014 vintage (the largest in the index), healthy write-ups in IT and healthcare were significant contributors, seeing about $1.3 billion and $800 million in write-ups, respectively.

Venture capital fund managers called $9.3 billion from investors during the first six months, a 5.7% increase from the last six months of 2017, and the third largest semi-annual inflow, behind the first six months of 2000 and the last six months of 2000, both of which experienced about $12 billion in capital calls. Distributions from venture funds were $14.9 billion, a 25.1% increase from second half 2017, and the sixth largest semi-annual output since the inception of the benchmark.

Funds formed from 2014 to 2017 were responsible for 87% ($8.2 billion) of the total capital called during the first six months. These four vintage years each called $1.5 billion or more; the 2016 vintage led the way with capital calls of more than $3.4 billion. Distributions from vintage years 2005–08, 2010, 2012, and 2014 totaled $11.4 billion, representing almost 76% of the total of the semi-annual period. These seven vintages each distributed an average of about $1.6 billion in the first six months.

Sectors

Figure 6 shows the GICS sector breakdown of the venture capital index and a public market counterpart, the Nasdaq Composite Index. The breakdown provides context when comparing the performance of the two indexes. The chart highlights the venture index’s relative overweights in healthcare and IT, and its underweights in consumer discretionary and financials. It is worth noting that the S&P 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 three meaningfully sized sectors had positive returns in first half 2018 (Figure 7). IT earned the best return (13.7%), narrowly beating out the healthcare sector (13.5%), while consumer discretionary companies posted the lowest return (3.6%). The IT return was mostly driven by write-ups in the 2012, 2014–15, 2005 and 2010 vintage year funds (in rank order) which, combined, represented about 55% of the sector’s net appreciation change. Healthcare valuations were concentrated in four vintages, 2010 and 2013–15. Consumer discretionary was relatively flat across all vintages with the exception of 2008 and 2014, which both returned slightly more than $100 million in write-ups for the period.

In keeping with historical norms, during the first six months, venture capital managers in the index allocated the lion’s share of their investments to IT, healthcare, and consumer discretionary companies (in rank order). At 85% of capital invested, the amount is about 2% lower than the long-term trend for the three sectors combined.

---

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