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US PE saw strongest performance in 8 quarters in Q2

Cambridge Associates’ US private equity index posted a 3.98% net IRR in Q2, the highest since it reached 5.44% in Q2 2014.

Private equity outperformed all other benchmark indices observed by research and advisory firm Cambridge Associates in the second quarter ended 30 June.

The Cambridge Associates US Private Equity Index returned a net 3.98 percent internal rate of return for the second quarter, beating nine other indices included in Cambridge Associates’ Q2 2016 benchmarking report, including the Dow Jones Industrial Average Index, S&P 500 Index and Bloomberg Barclays Government/Credit Bond Index. 

The last time Cambridge Associates’ private equity index outperformed that figure was in the second quarter of 2014, when it returned 5.44 percent net IRR.

The Russell 2000 Index, which follows the 2,000 smallest companies in the Russell 3000 Index, a US stock market indicator, came in at a close second, delivering 3.79 percent net IRR for the quarter.

The second-quarter performance for the private equity index fared far better than it did in the first quarter, when it returned just 0.23 percent net IRR. It also surpassed the 3.77 percent net IRR realised in the second quarter of 2015.

Similarly, longer-dated returns based on 10-year, 15-year, 20-year and 25-year time frames leading up to 30 June saw private equity reach higher IRRs than all of the other indices observed, reflecting the long-term nature of the alternative asset class.

It was a slightly different story for the year-to-date, one-year, three-year, and five-year periods. The private equity index underperformed against several benchmark indices for those timeframes. For example, while private equity reached a relatively high return of 11.83 percent net IRR in the three years leading up to 30 June, it underperformed the 12.48 percent return by the Nasdaq Composite Index.

For the year ended 30 June, private equity delivered a 3.01 percent net IRR, which was the lowest one-year performance since the year ended 30 June 2008, when it returned a measly 2.72 percent. In comparison, for the year ended 30 June 2014, private equity returned 22.33 percent, and for the year ended 30 June 2011, it returned 25.42 percent.

In terms of IRR by vintage years, the years leading to the financial crisis continue to deliver single-digit returns. As of 30 June 2016, 2005-vintage funds marked an 8.75 percent net IRR, and 2006-vintage funds an 8.24 percent net IRR. By comparison, 2001-vintage funds achieved 22.32 percent net IRR, and 2009-vintage funds had 16.8 percent net IRR as of this date.

Cambridge compiled data from 1,283 private equity funds formed between 1986 and 2014 for vintage-year performance, and from 1,321 US private equity funds for the indices returns.