First Half 2023 Highlights

• Both private asset classes posted lower short-term returns (six months and one year) than the public markets as of June 30, 2023, but over longer periods, the reverse is true. The US PE index outperformed the relevant public indexes by at least 200 basis points in every period longer than three years. The US VC benchmark had similar success against the public indexes over longer time horizons, other than against the Nasdaq Composite in the 15- and 20-year periods ending in June.
• By market value, public companies continued to account for a slightly larger percentage of the VC index than of the PE index (about 9% and 7%, respectively). With respect to non-US companies, the reverse has been true and in 2023, those companies represented about 20% of private equity and 13% of venture capital.

US Private Equity Performance Insights

Vintage Years

As of June 2023, seven vintage years (2015–21) were meaningfully sized—representing at least 5% of the benchmark’s value—and, combined, accounted for 80% of the index’s value. Six-month returns among the key vintages ranged from 2.7% for vintage year 2015 to 6.7% for vintage year 2017 (Figure 2). Another 13% of the index’s value resided in three vintages, 2013–14 and 2022.

Write-ups in IT, industrials, and healthcare led to strong returns, propelling the top-performing vintage (2017), while more modest valuation increases in those sectors coupled with losses in communication services and financials drove the performance for the lowest-returning vintage (2015). Two other vintages (2012 and 2014), which together represented almost 7% of the index, posted returns of 8.1% for the period (with double-digit returns in both healthcare and IT).

Limited partner (LP) cash flow amounts in the first half of 2023 were the lowest for any half-year period since the first half of 2020. During the first two quarters of the year, fund managers distributed $49.6 billion and called $73.5 billion, and activity in the second quarter was lower than in the first. Since the beginning of 2022, capital calls outpaced distributions in every quarter, with a call to distribution ratio of 1.4x during the 18-month stretch. This trend could raise liquidity questions for many mature private investment programs that rely on distributions to fund capital calls.

Three vintage years (2019, 2021–22) represented 77% ($57 billion) of the capital calls, with each drawing down at least $10 billion in first half 2023; the 2021 vintage called almost $30 billion. There were far more vintages contributing to the distribution total, with 11 (going all the way back to 2008) returning at least $1 billion to LPs. Four vintage years (2015–17, 2019) combined to distribute $29 billion (60% of the total) as they each returned more than $6.6 billion.

Sectors

Figure 3 shows the Global Industry Classification Standard (GICS®) sector breakdown by market value of the US PE index and a public market counterpart, the Russell 2000® Index. The comparison provides context when comparing the performance of the two indexes. The PE index has a significant overweight to IT and communication services and a meaningful underweight to energy and real estate (reflected in the “other” category). The public market’s longstanding overweight to financials was less significant as of June 2023 (only a 5% difference between the indexes).

As of June 2023, among the six meaningfully sized sectors, IT has continued to dwarf the others by size, representing about 36% of the index’s value and more than double the weight of the next largest sector, industrials. The key sectors posted first half returns ranging from 4.7% for communication services to 7.3% for both IT and consumer discretionary (Figure 4). IT investments were written up in all but one of the vintages from 2008 to 2021 and the biggest contributors to the sector’s overall return were 2018–19 and 2021. Vintage years 2015, 2018, and 2020 were the key drivers of the consumer discretionary results with all three earning double-digit returns in the sector.

Four sectors garnered more than 80% of the capital invested by US PE managers in the first half of 2023—industrials (32%), IT (23%), healthcare (17%) and financials (11%). Over the long term, managers have allocated a bit more than 60% of their capital to those sectors. The percentage of capital allocated to industrials—which historically was about 16% of invested capital—drove the difference.

US Venture Capital Performance Insights

Vintage Years

As of June 2023, eight vintage years (2014–21) were meaningfully sized and combined, accounted for 76% of the index’s value. Performance for the key vintages was generally weak, ranging from -3.5% (2014) to -0.3% (2017) during the first half of the year (Figure 5). While down much more modestly, the VC index’s six-quarter streak of negative returns is its first since the 2000–03 period when there were ten consecutive negative quarters.

For the best-performing vintage (2017), write-downs in communication services, financials, and IT were largely offset by write-ups in healthcare. In the lowest-performing vintage, 2014, write-downs were most pronounced in IT, consumer discretionary, and healthcare (in rank order).

In first half 2023, VC managers called $13.6 billion from and returned $8.9 billion to LPs, dipping to a total cash flow level unseen since the second half of 2017. While public markets rebounded on the strength of a small number of companies, venture valuations continued to reset and the initial public offering window remained closed, slowing both investing and exiting. Like in the US PE index, capital calls have outpaced distributions since the first half of 2022 at a ratio of 1.2x (calls/distributions).

Three vintages (2020–22) accounted for 81% ($11 billion) of the total capital called during the first six months. While each called more than $2.6 billion, the 2022 group called the most ($5 billion). Distributions were less concentrated than contributions; the six vintages (2012–18) that returned at least $500 million to LPs represented 72% of all distributions. Three of the six vintages (2012, 2014, 2016) distributed more than $1 billion.

Sectors

Figure 6 shows the GICS® sector breakdown of the VC index by market value 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 VC index’s significant relative overweight in healthcare and less pronounced higher exposures to financials and industrials. The VC index’s exposure to IT has historically been higher than that of the Nasdaq, but in 2023, a tech-driven rebound in the public markets combined with negative returns in the sector in venture capital helped lead to a slight IT overweight in the Nasdaq. The public index’s weightings in communication services and consumer discretionary are meaningfully higher than those of the VC index.

Collectively, the five meaningfully sized sectors made up 90% of the VC index (Figure 7). Performance among the six ranged from -4.6% for communication services to 6.3% for industrials. At only 7% of the index’s value, the industrials sector’s strong performance did not offset the flat or negative returns in larger sectors, particularly healthcare and IT. The largest contributors to the industrials sector’s return were vintages 2007 and 2010–11. Driving the IT sector’s results were the negative returns posted by six of the eight key vintage years.

During the first six months, VC managers in the index allocated about 84% of their invested capital to IT (36%), healthcare (33%), and financials (15%) investments. Over the long term, those sectors have garnered 76% of capital, with the difference driven by the larger than normal allocation to financials in 2023.

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Caryn Slotsky, Senior Investment Director
Wyatt Yasinski, Associate Investment Director
Drew Carneal, Senior Investment Associate