China repays private equity investors’ faith

Emerging-market PE returns fell in 2015 despite a storming fourth quarter, says Cambridge Associates, with Chinese assets outperforming and media the clear leader by sector.
China repays private equity investors’ faith

Returns from emerging-market private equity and venture capital funds beat those of non-US developed market PE and VC funds and of EM public markets last year, but were well down on 2014, according to investment consultancy Cambridge Associates.

Still, the big EM gorilla – China – handsomely repaid PE investors’ faith, while EM sector-wise, media was way out in front in terms of returns. IT also performed well for full-year 2015.

The Cambridge Associates LLC EM PE and VC Index gained 5.1% in the fourth quarter and 8.5% for the year, a drop of almost 6 percentage points from its 2014 year-end result. As a comparison, the MSCI Emerging Markets index rose 0.7% for the quarter but dropped 14% for the year.

Meanwhile, the Cambridge Associates LLC Global ex-US Developed Markets PE and VC Index returned 2.0% in dollar terms in Q4, bringing gains for the year to 5.7%, a slight improvement over 2014. To compare, the MSCI EAFE returned 4.7% for the quarter but fell -0.8% for the year.

China outperforming

China continues to dominate EM PE and VC, with mainland companies outperforming the index and receiving and returning more capital than those elsewhere. In the fourth quarter, the amount invested in Chinese firms was roughly three times that invested in those in the next largest country, India.

China-based companies returned 10.0% for the quarter and 21.4% for the year. Vintage years 2007, 2008, 2010, 2011 and 2012 were the drivers of this strong performance. 

Companies based in China, India and South Korea represent 62% of the EM PE/VC index’s value, and their combined dollar-weighted return was 8.3% in Q4 2015. 

India, while barely positive in Q4 (0.5%), returned 8.0% for the year. Vintages 2010, 2012 and 2013 buoyed South Korea's performance, but underperformance among 2005 and 2007 vintage funds partially offset those gains. South Korean firms returned 6.3% in Q4 and 4.4% in 2015.

Media out in front 

Media was by far the best-performing sector for both the quarter and year in emerging markets, returning 30.2% and 55.8%, respectively, to investors. The second-best performer for the quarter was manufacturing, with a 7.5% return, and for the year was IT, gaining 21.2%. 

The energy sector, which in 2015 fell to less than 3% of the index, declined -0.3% for the quarter and -21.6% for the year.

The top-performing vintage year for EM PE and VC in the fourth quarter was 2011, which returned 9.8% in Q4 and 26.0% for the year. The consumer and IT sectors drove this strong performance, noted Cambridge Associates. 

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