Private Equity Index" GS0351: Providing Statistical Information To Others: TF0000: As To "Cambridge" Cambridge Associates’ Private Investments Database is one of the most robust collections of institutional quality private fund performance. AS OF SEPTEMBER 30, 2019. page | AUSTRALIA PRIVATE EQUITY & VENTURE CAPITAL INDEX. If you include manager overweights and underweights relative to benchmarks in your ongoing monitoring of allocations for the purposes of rebalancing, you may end up offsetting allocation decisions that you have paid managers to make. Today, 6.0% is a reasonable approximation, although index weights should gradually increase provided Chinese policy makers move forward with their stated ambitions to open up markets over time. GROSS COMPANY–LEVEL PERFORMANCE FIGURE 2 DEVELOPED MARKETS EX US PE/VC INDEX VINTAGE YEAR RETURNS: MSCI data provided “as is” without any express or implied warranties. FIGURE 3 GICS SECTOR COMPARISONS: CA US PRIVATE EQUITY VS RUSSELL 2000® Show data source * PE Source: Cambridge Associates, Global Private Equity Benchmark Statistics, Q4-2019. As of June 30, 2019 • Percent (%)[/caption]. In addition, we capture t he performance Capital calls totaled $51.7 billion, a 6% decrease, while distributions equaled $54.7 billion, an 18% decline from the six months ended December 2018. Firms totaling an additional 19% of market capitalization have both private and government shareholders, with no clear controlling ownership. Managers distributed just less than $10.5 billion year-to-date, matching the distribution total in the prior six-month period. How do investors measure China portfolio exposure? For investors with large or mature private investment allocations to China, using a portion of distributions to fund public equities may make sense; those with only public equity investments in China should seek to diversify private equity allocations into Chinese private investments. Businesses in the United States garnered about 15% of the capital invested, which is a few percentage points higher than its long-term allocation. Among the key sectors, IT earned by far the highest return and communication services the lowest. Write-ups for consumer discretionary companies were by far the largest positive contributor to the 2006 and 2010 vintage years’ performance. Read More » June 2020 The developed and emerging markets PE/VC indexes have outperformed their public market counterparts across time (based on modified public market equivalent [mPME] returns). Single-country mandates, especially in public emerging markets equities, can be highly volatile, and investors that don’t appreciate this characteristic may not last for the long term—a prerequisite for successful investing. MSCI data provided “as is” without any express or implied warranties. CHINESE PE & VC HAVE ADDED VALUE TO PUBLIC MARKET EQUIVALENTS. Cambridge Associates’ Private Investments Database is one of the most robust collections of institutional quality private fun d p erformance. As discussed earlier, the investible China universe is underrepresented in many benchmarks. The sector’s attractiveness has spurred growth in the manager universe, including specialist private healthcare funds. Sources: Cambridge Associates LLC, FactSet Research Systems, and MSCI Inc. MSCI data provided “as is” without any express or implied warranties. As of June 30, 2019 • USD Terms • Percent (%). All-China mandates offer managers the most flexibility in implementing China long-only public equity allocations. The main considerations when choosing between these mandates relate to diversification benefits, volatility, alpha potential, exposure to dynamic “new China” sectors, and implementation complexity. There is no single answer for how much investors should allocate to China, but 5% to 10% of the total portfolio seems reasonable, based on the investible opportunity set and the attractive market environment. Cambridge Associates (CA) has decided to (1) adopt distribution and commercial policies that are more in line with other performance/index data providers, and (2) partner with IHS Markit, a world leader in critical information, analytics, and solutions, to leverage their global financial markets data and index distribution platform. A-SHARE DIVERSIFICATION BENEFITS OFFSET HIGHER VOLATILITY AT PORTFOLIO LEVEL. The trade-off is that adoption of All-China allocations involves more complexity, since the mandate overlaps with existing global emerging markets (GEM) managers and regional Asia managers. Stock index shorting is about to get easier for foreign investors as futures contracts on the portion of Chinese A-shares included in the MSCI EM Index (the MSCI China A Index) will also be available for trading on Hong Kong’s stock exchange in November, pending regulatory approval. FIGURE 3 GICS SECTOR COMPARISONS: CA DEVELOPED MARKETS EX US PE/VC VS MSCI EAFE Of the more than three dozen China A-share managers that reported performance to eVestment five years ago, 65% continued to report returns throughout the five-year period and 55% outperformed their stated benchmark net of fees. Copyright © 2021 Cambridge Associates LLC. The China-dedicated long/short equity manager universe is also developing, as shorting capabilities expand within the onshore market; this merits watching. AS OF MARCH 31, 2019. page | US PRIVATE EQUITY (LEGACY DEFINITION) OVERVIEW. Six-month returns among the six sectors ranged from 6.4% (communication services) to 17.4% (IT) (Figure 4). Distributions from vintage years 2005–08, 2010, and 2012–14 totaled $12.9 billion, representing almost 73% of the total of the semi-annual period. Private Equity index and benchmark statistics are based on data compiled from more than 1,500 institutional-quality buyout, growth equity, private equity energy, and subordinated capital funds formed between 1986 and 2019. AUSTRALIA PRIVATE EQUITY & VENTURE CAPITAL INDEX. Driving the difference is the percentage of capital allocated to IT, which historically was about 22% of invested capital. Six vintages, 2007–08 and 2010–13, each distributed at least $2.0 billion for a combined amount of $20.7 billion (84% of total distributions). OVERVIEW OF TACTICAL CA HOUSE VIEWS On a one-, three- and five-year horizon, Cambridge Associates data, the most widely cited benchmark of venture capital performance, shows that its index for European VC performance is either on par or significantly outperforming indices for both US VC and, importantly, European Private Equity. We evaluate this time horizon because 1993 is the year our index data begins, and 2015 is the most current vintage year mature enough to evaluate. The breakdown provides context when comparing the performance of the two indexes. MSCI Emerging Markets Index OVERVIEW. For calendar year 2019, US private equity and venture capital produced high double-digit returns, as indicated by the Cambridge Associates LLC benchmark indexes. Private investing in China, particularly venture capital, has certainly been the investment of choice in China since the market began to open to foreign investors. The Drawing Is Amended To Appear As Follows: Cambridge Associates Llc U.S. Total returns for MSCI China and MSCI All Country World (ACWI) are gross of dividend withholding taxes. As of June 30, 2019, the MSCI ACWI consisted of 49 country indexes comprising 23 developed and 26 emerging markets country indexes. Figure 1 depicts performance for the private asset classes compared to the public markets. Private investments (especially venture investments in healthcare) and long-only public equities offer the most appeal today. As institutional investment increases, managers’ ability to add alpha may decrease, but this will take time. 5 Free-float limitations restrict investor access to just 37.3% of the onshore A-share market, and 42.6% of the broad (onshore and offshore) Chinese equity market. 6 Note: Distributions are net of recallable returns of capital. Most investors have not traditionally tracked their exposure to China on a look-through basis across the total portfolio. China A-share and All-China mandates provide diversification benefits to portfolios. Underweights are most significant in financials, with smaller underweights in energy and materials. MSCI country index returns are trailing 12-month total returns, gross of dividend withholding taxes, and are in USD terms. However, investors may obtain access to this market via certain global and emerging markets bond managers. We see some anecdotal evidence of this in managers we track closely, as some have been increasing their exposure to Chinese A-shares ahead of the index inclusion ramp-up. Given the time it takes to build allocations and that China’s share of investments is rising, 15% is a reasonable goal for China as a share of venture capital, growth equity, and buyout allocations in total over the next five years. In 2018, this vintage also produced the best return, topping 34.6% for the calendar year. These challenges have limited the list of institutional-quality long/short hedge funds with credible All-China track records. Depending on allocations to these areas (both dedicated mandates and Chinese asset exposures by regional or global managers), we think it is reasonable to target China exposure as 5%–10% of the total portfolio. During the first two quarters of 2019, fund managers called and distributed less capital than they did in the previous six months. State Street’s Private Equity Index up to a 4.35 per cent in Q4 2019 State Street’s Private Equity Index up to a 4.35 per cent in Q4 2019 . As for credits, we see pockets of opportunities in both onshore and offshore credit, but prefer to address these opportunities through lock-up managers. The funds in this index invest primarily in Africa, emerging Asia, emerging Europe, Latin America & Caribbean, and the Middle East ex Israel. Sources: Cambridge Associates LLC, Frank Russell Company, and FTSE International Limited. After adjusting for free float, China A-shares account for 24% of the Chinese equity market, and after adjusting for investability, 15%. In other words, we multiplied the share of the hedge fund universe that is invested in long/short hedge funds by the 6.0% weight of investible China stocks, to get 1.7%. As of June 30, 2019, except for the most recent six-month period, the private equity benchmark had outperformed the public indexes in all time periods. 6 Note: Distributions are net of recallable returns of capital. As of June 30, 2019 • Percent (%). Funds in the 2014 vintage, the largest vintage of those meaningfully sized, returned the most capital, topping $2.1 billion for first half 2019. Total fund-level cash flows (contributions plus distributions) were the third highest for any six-month period in the history of the index, a figure that has experienced a primarily upward trend since the most recent low in first half 2003. Investors with large emerging markets or Asia public equity overweights should consider such allocations as a good funding source for either public or private investments in China. Cambridge Associates’ Private Investments Database is one of the most robust collections of institutional quality private fund performance. It contains the historical performance records of over 2,000 fund managers and their over 7,800 funds. In a related action, the Export Control Reform Act of 2018 requires certain federal agencies to assess the licensing requirements on US exports. The Cambridge Associates LLC Emerging Markets Private Equity and Venture Capital Index earned 5.8%, with a much stronger first quarter than second (4.3% and 1.4%, respectively). Performance varied among the large vintages, with returns ranging from -3.9% (2008) to 10.8% (2016). FIGURE 6 EMERGING MARKETS PE/VC INDEX VINTAGE YEAR RETURNS: Cambridge Associates derives its Emerging Markets Private Equity and Venture Capital Index from the financial information contained in its proprietary database of global ex US buyouts, growth equity, and venture capital funds. These four vintage years each called more than $1.1 billion; the 2018 vintage led the way with capital calls of more than $3.0 billion. This report gives you access to extensive data, including fund index analysis and fund since inception analysis. While the median GEM manager in the eVestment database has been underweight China relative to the MSCI EM Index, the difference has been small and has decreased as the benchmark weight to China has grown. The best way for many investors to use hedge funds in China may be through well-established, Asia-focused long/short managers, especially since many investors have little hedge fund exposure to the region as a whole. We cannot overstate the importance of both these factors. The index is a horizon calculation based on data compiled from 2,220 private equity funds, including fully liquidated partnerships, formed between 1986 and 2019. Note: Correlations are based on monthly total returns, net of dividend withholding taxes. If RMB-denominated bonds were fully included in the global market benchmark, they would account for about 15% of the market today. The public index’s shares are purchased and sold according to the private fund cash flow schedule, with distributions calculated in the same proportion as the private fund, and mPME NAV is a function of mPME cash flows and public index returns. Furthermore, managers can add value by identifying companies with improving governance before the market reassesses these value opportunities. Over the last five years, China has accounted for an average of 24% of investments in venture capital and 10% of investments in growth equity globally. Energy, real estate, and utilities sectors are not included for scaling purposes. The CA Private Equity Index is a pooled horizon IRR calculation based on quarterly data compiled from 2,193 private equity funds (buyout and growth equity), including fully liquidated partnerships, formed between 1986 and 2019. The MSCI All Country World Index (ACWI) is a free float–adjusted, market capitalization–weighted index designed to measure the equity market performance of developed and emerging markets. The sectors outside of the three largest returned 9.0% during the same period. However, it will take time for these distinctions to disappear. Within global equity markets, while the index share of Chinese companies is just 3.9%, the revenue exposure is 9.5%. Cambridge Associates client to take a 20% ownership stake in firm. As of June 30, 2019, the database comprised 674 emerging markets private equity and venture capital funds formed from 1986 to 2019 with a value of about $244 billion. In total, the share of Chinese stock market capitalization accessible to foreign investors accounts for 6.0% of global equities and 43.8% of emerging markets equities, making China the third largest equity market in the world (behind the United States and Japan). 5 Preqin, Private Capital Fundraising Report, Q4 2018. IT (42%), healthcare (12%), consumer discretionary (12%), and industrials (10%) attracted more than 75% of the capital invested, which is about 11 percentage points higher than the investments in these sectors over the long term. First, consider the scale of the China investment opportunity set as a percentage of various markets in which you invest. Both A-share and All-China managers have the opportunity to add value to portfolios through diversification and manager alpha. Median fund performance differs from total vintage year returns in that vintage year returns are asset weighted. Private Equity Index® (Data as of 12/31/18) and S&P 500 Total Return data AS OF DECEMBER 31, 2019. page | AUSTRALIA PRIVATE EQUITY & VENTURE CAPITAL INDEX. As of June 30, 2019 • USD Terms • Percent (%). Source: eVestment. Wyatt Yasinski, Investment Associate. Similarly, such countries’ equity markets tend to have the most sensitivity to changes in Chinese leverage. China equity mandates have been evolving as access to China’s vast equity market improves. Represents pooled horizon IRR and first-quartile return for the Global All Private Equity Index from Cambridge Associates as of December 2019, which is the latest data available. Ten years ago, as of June 30, 2009, the benchmark index included 535 global ex US developed markets funds, whose value was roughly $144 billion. As they decreased in aggregate, cash flows also moved closer to a state of equilibrium, as the difference between calls and distributions was less than a billion dollars in the second quarter. Distributions from venture funds were $17.7 billion, almost a 26% increase from second half 2018, and the third largest semi-annual output since the inception of the benchmark. Show data source * PE Source: Cambridge Associates, Global Private Equity Benchmark Statistics, Q4-2019. MSCI China Index Data from 1/1/1988 to present represented by MSCI Emerging Markets total return gross. Private Investments data are based on trailing 5-year annual averages through December 31, 2018. We approach the issue using a three-step process. Investors might argue that China’s private investments have achieved higher returns because they take greater risks, but this does not seem to be the case. NET FUND–LEVEL PERFORMANCE AS OF MARCH 31, 2019. page | AUSTRALIA PRIVATE EQUITY & VENTURE CAPITAL INDEX. The MSCI EAFE Index is a free float–adjusted, market capitalization–weighted index that is designed to measure large- and mid-cap equity performance of developed markets, excluding Canada and the United States. CHINA IS UNDER-REPRESENTED IN GLOBAL BENCHMARKS. Included in this calculus is an understanding of the portfolio’s current China exposure, both direct and indirect. Sources: MSCI Inc. and Thomson Reuters Datastream. S&P 500 Total Return Index as sourced from Yahoo Finance. In communication services (the smallest of the key sectors), write-ups were relatively modest, with vintage year 2012 seeing the highest amount of writeups. Since its inception, the 2011 vintage has invested nearly equal amounts in three key sectors, IT, industrials, and consumer discretionary. However, several investment themes seem far from saturation and offer the potential for continued strong returns: healthcare, mobile internet, and investments related to serving changing consumption patterns. This edition of VantagePoint addresses five key implementation questions as a follow up to our recent report, “The Case for Dedicated China Exposure.”. The slightly greater diversification offered by China A-shares offsets its relatively higher volatility when compared to All-China mandates. For vintage year 2008, the lowest performing of the group, healthcare and consumer discretionary valuations drove returns. Such managers also provide diversification to global private equity and venture capital portfolios, which tend to be US-centric. MSCI data provided “as is” without any express or implied warranties. Should investors implement through public or private equities? Private equity includes buyouts and growth funds. To estimate a baseline allocation to China in hedge funds, we assume that most China exposure would be in the long/short segment of the market and that it would be proportional to the investable share of China’s public equity market. Market concentration in SOEs has been falling across all industries since the mid-2000s and is concentrated within five sectors: energy, materials, telecommunications, utilities, and industrials. Such managers focused on Hong Kong– and Taiwan-listed companies. As of June 30, 2019, the database comprised 839 global ex US developed markets buyouts, growth equity, and venture capital funds formed from 1986 to 2019 with a value of about $266 billion. Despite its “age,” the 2007 vintage year still represented one of the largest components of the index. The first is for periodic rebalancing purposes and the second is for risk management when exposures become extreme (in either direction). Data from 1/1/1988 to present represented by MSCI ACWI gross total return. * Includes US buyout and growth equity funds only. In August 2018, the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) was signed into law. The developed and emerging markets PE/VC indexes have outperformed their public market counterparts across time (based on modified public market equivalent returns). As of June 30, 2019, it included 23 developed markets country indexes: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Hong Kong, Ireland, Israel, Italy, Japan, the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. All Rights Reserved. Managers of funds that were raised in 2015–18 called most of the capital in first half 2019, totaling almost $9.0 billion and about 80% of all capital called year-to-date. Private investments have strong long-term appeal, with healthcare venture capital offering the most attraction. Those managers that include A-share listings do so in the long book, using indexes or onshore shares on the short side. The overlap for A-share mandates is likely to be limited, as A-shares are largely absent from GEM managers and regional Asia benchmarks, although we have seen some GEM managers embrace A-share investments ahead of the index providers. When setting China targets, investors should consider the impact of heavy allocations to these Asian equity and commodity-driven markets, which could also serve as a funding source for dedicated China allocations, while recognizing that these relationships may change over time, as China continues to focus more on developing a stronger consumer base and de-emphasizing the industrial sector. Capital calls were largely concentrated among five vintage years (2014–18), each of which drew down at least $7.7 billion in first half 2019; as a group, they called $46.5 billion and accounted for 90% of the capital drawn during the period. This is a low-end estimate, given that we assume that there is no China exposure for a number of asset classes for which we don’t have data (e.g., real assets). Companies across five sectors (in rank order: consumer discretionary, healthcare, industrials, financials, and consumer staples) garnered 73% of the capital invested in the first six months of 2019, with consumer discretionary, healthcare, and industrials alone attracting more than 53% of all capital. Phalippou says the true picture, once costs are taken into account, is that the average fund has failed to beat the returns from an S&P 500 index … Indeed, managers that launched A-share-only mandates years ago are now updating their prospectuses to allow investment in offshore China stocks, while offshore China strategies are adapting to include A-share investments. Foreign ownership restrictions limit investor access to A-shares further still. All four meaningfully sized sectors had positive returns in first half 2019, and collectively these sectors make up more than 85% of the index (Figure 7). GROSS COMPANY-LEVEL PERFORMANCE The number of funds and CA Modified Public Market Equivalents (mPME) correspond with the China PE /VC benchmark. FIGURE 9 EMERGING MARKETS PE/VC INDEX COUNTRY RETURNS: China’s weight in a simple global stock/bond index portfolio could reach more than 6% over the coming years, based on current estimates of investible market weights. Over the long term, these sectors have attracted about 80% of invested capital; IT company investments account for nearly all the difference. Should investors be concerned about the impact of The Committee on Foreign Investment in the United States’ (CFIUS) expanding oversight over cross-border investments? 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