Tech investments drive strong PE returns performance

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A surge in the performance of tech investments was a key driver of US private equity returns across 2017 and 2018, new research from Cambridge Associates suggests.

The investment house said its Cambridge Associates Global ex-US Developed Markets Private Equity Index returned 20.4 per cent for the year ending 30 June 2018, while the equivalent index for listed companies, the MSCI EAFE Index, returned just 6.9 per cent.

Cambridge Associates said the strong performance of private equity funds over that period was based on their successful allocation of capital to technology investments, which delivered the highest returns of all sectors in the first half 2018.

Meanwhile, private equity funds invested less in financial services businesses, a sector which has delivered low returns in comparison to the rest of the market and technology in particular.

Tech represented 21.5 per cent of the Cambridge Associates Global ex-US Developed Markets Private Equity Index, but only 6.8% of the MSCI EAFE index.

Financials, the worst performing sector, represent 7.4 per cent of this Private Equity Index but are a larger component of stock markets, at 19.8 per centof the MSCI EAFE index.

The firm said its equivalent emerging markets private equity index returned 17.2 per cent over the last year, well above the MSCI Emerging Markets Index’s 8.4 per cent.

Tech investments represented 30.6 per cent of the Global ex-US Emerging Markets Private Equity Index and delivered returns of 21.3 per cent over the first half of 2018, the highest of all sectors.

Nicolas Schellenberg, Head of EMEA PE & VC Research at Cambridge Associates, said, “Private equity funds have made a calculated bet on overweighting technology which has paid off.

“That overweighting in technology is a large component of the outperformance of listed company indexes. That outperformance is not the result of luck or chance.

“However, private equity is a lagging asset class, so the recent dip in technology valuations seen in the public markets is yet to be reflected in valuations.”

In US-dollar terms, three of the seven meaningfully sized countries in the index (accounting for 72 per cent of its value) posted double-digit positive returns during the first two quarters.

Companies based in the Netherlands 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, the UK, and Germany— was 8.8 per cent, about 15 basis points higher than the index’s total gross return, Cambridge Associates said.

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