Study: Developed markets outperform emerging peers

For the second quarter in a row, private equity and venture capital investments in developed markets, bar the US, surpassed the performance of similar investments in emerging markets, according to research from Cambridge Associates.

Cambridge’s developed markets (ex-US) index rose by 6.7 percent in the second quarter (ending June 30) compared to a 3.2 percent rise for the firm’s emerging markets index. The firm defines developed markets (ex-US) as Australia, Canada, Israel, Japan, New Zealand and Western Europe. ‘Emerging markets’ comprise Africa, ‘emerging Asia’, ‘emerging Europe’, Latin America, and the Middle East (ex-Israel).

The indices are capital-weighted, so the largest years drive the overall performance of the index. For developed markets, the ‘largest’ vintage year was 2006, with funds of that vintage generating an 8 percent return for the quarter. For emerging markets, the largest year was 2007, with funds generating a 4 percent return.

However, 2004-vintage funds for both indices delivered the highest returns: 9.4 percent for developed markets and 6.6 percent for emerging markets. 

GPs in developed markets also returned more capital to their investors than they called down: $11.8 billion compared to $9.6 billion. Distributions rose by 21 percent over the quarter while capital calls rose 10 percent.

There were similar rises in emerging markets, with capital distributions rising 11.5 percent to $2.9 billion and calls rising by 51 percent to $4.1 billion.

In developed markets, chemicals and materials companies generated the strongest returns with an 11.1 percent increase, ahead of the consumer sector (with a 9.3 percent rise), healthcare and manufacturing.

The information technology sector was the principal contributor to returns in emerging markets, with returns rising 26.7 percent in the second quarter. Financial services was the only sector to make a loss overall in emerging markets, Cambridge said.

Companies based in Western Europe attracted 64 percent of the capital invested in the second quarter by GPs included in the developed markets index. Those in ‘emerging Asia’ garnered the most investment in the emerging markets index, with 69 percent.

The situation is unlikely to last however, with European returns in particular expected to plummet as a result of the ongoing Eurozone crisis.

Ralph Jaeger, a senior research consultant and co-head of international private equity and venture capital research at Cambridge Associates, said in a statement: “While ex-US developed markets have bested emerging markets in the first half of 2011, we expect the worsening situation in Europe to have a significantly negative impact on the ex-US developed markets index return in the third quarter of 2011. But since emerging markets are not completely decoupled from developed markets, we expect to also see lower performance in the emerging markets during the second half of 2011.”