Australian Private Equity and Venture Capital – Strong Performance Continues

Eugene Snyman – Managing Director, Cambridge Associates
Javern Cheah – Associate Investment Director Cambridge Associates
Samuel Masters – Investment Analyst, Cambridge Associates

Performance Highlights December 2020

  • Industry Snapshot: The Australian private equity and venture capital (PE/VC) industry is significant, with $30.3 billion of capital raised to date. In 2020, the industry continued to deploy capital into Australian and New Zealand companies and distribute capital back to investors. In aggregate over the 12-month period ending December 2020, the industry invested $1.9 billion and distributed more than $1.7 billion, net of fees, back to investors.
  • Strong Long-term Performance: Australian PE/VC continues to demonstrate strong long-term net of fees performance for investors, outpacing the ASX 300 and the ASX Small Ordinaries for the 5, 10, and 20-year periods ending 31 December 2020 – tracking between +1.5% and +10.9% ahead of the listed markets. Long-term performance of the local market (over 20 years) remained ahead of global peers, while mid-term performance (over 5 years) lagged.
  • PE/VC amid COVID-19: Australian PE/VC performance held-up well for the year to date (as measured through 31 December 2020), besting listed markets over this period. Among global peers, Australian PE/VC was ahead of Developed Europe and Developed Asia but lagged strong returns from US PE/VC, primarily due to a lower relative allocation to Information Technology in the Australian PE/VC market.

Industry Snapshot

The Australian PE/VC index represents a well-established asset class that has invested significant capital for LPs and returned strong net distributions. At the conclusion of Q4 2020, the Cambridge Associates Australian PE/VC Index represented $30.3 billion raised by 109 PE/VC funds. Over the 20-year period of data captured by the index, the industry has invested $25.6 billion (+$1.6 billion in 2020) in Australian and New Zealand companies, returning $29.2 billion (+$1.7 billion in 2020) net of fees back to investors and holding unrealized investments valued at $11.2 billion (+$2.2 billion in 2020). The universe is historically dominated by buyout and growth equity strategies, representing 93% of total capitalization, while venture capital funds represent 7% of the index. In 2020, buyout and growth equity funds provided nearly 95% of the distributions to investors, with venture capital representing close to 5% of distributions. By net asset value as at 31 December 2020, buyout and growth equity accounted for 77% of the index, with 23% in venture capital.

The Australian Private Credit market remains young relative to the US or Europe but has been developing well. Fundraising activities have increased in recent years, driven by the appetite from Australian businesses for bespoke financing solutions, especially within the middle market where the smaller cheque size and higher cost of business have historically been less appealing to traditional banking institutions.

Long-Term Performance Remains Strong

Over the long term, Australian PE and VC returns showed continued strong long-term performance, delivering double digit net of fees returns over 5-, 10-, and 20-year periods (Figure 1). Over these same periods, Australian PE/VC managers in aggregate demonstrated robust outperformance over the listed markets, outpacing the ASX 300 Index by +3.6% to +6.1% and the ASX Small Ordinaries Index by +1.5% to +10.9% on a public market equivalent (mPME) basis. To measure mPME, Cambridge Associates compared private equity performance to that of listed equities by hypothetically ‘investing’ in the ASX 300 and the ASX Small Ordinaries at the same time and equivalent amount as the private equity investments. While it is generally accepted that the higher risk and illiquidity of private equity require it to generate returns of +3% to +5% over listed markets over time, the local PE and VC index has largely achieved this standard hurdle across periods.

Manager selection and the ability to access top performing managers provided higher absolute returns net of fees and relative to the listed markets. In the data gathered by Cambridge Associates, the top two quartiles of Australian PE/VC funds have delivered 18%+ annualized returns over 5-, 10-, and 20-year periods ending 31 December 2020. This universe exceeded returns of the broad Australian PE/VC industry by +4.9% to +7.8% per annum over time, while also outperforming the ASX 300 Index by +11.0% to +11.7% and the ASX Small Ordinaries Index by +9.3% to +15.8% on a public market equivalent (mPME) basis.

Australian PE/VC performance remains competitive among global peers over time. On a local currency basis, with each region measured in its base currency unless noted otherwise, Australian PE/VC returns exceeded US and Asian PE/VC peers but lagged European PE/VC over the 20-year period (Figure 3). Over 5- and 10-year periods, Australian performance lagged global PE/VC, reflecting local market factors including interest rates, valuations, market depth and sector exposures.

Australian PE/VC as COVID Continues

The Australian PE/VC Index was up 21.3% in 2020, outperforming the mPME of public indices by +18.4% (ASX 300) and +10.2% (ASX Small Ords) for the period (Figure 4). The fourth quarter (ending 31 December 2020) saw listed markets recovered from their COVID19 losses in the prior quarters while the strong performance of the Australian PE/VC index continued (+16.8%). The compounding effect of lower mark-to-market downside from the PE/VC index contributed to the aggregate outperformance versus listed peers for the year. Public markets experienced a significant drawdown in 1Q but recovered all losses in 4Q with major indexes up YTD for the first time in 2020. Small caps experienced a stronger post-COVID recovery than their large-cap counterparts.

While it is useful to measure the industry’s cash flows over a quarterly or 12-month period to provide a snapshot of the recent market volatility, this periodicity does not provide a meaningful performance indicator for a long-term asset class. Private equity and venture capital performance is measured over the medium to long-term (5- to 20-year periods) to align performance with the strategy of acquiring and divesting investment assets.

In line with global developed PE/VC peers, Australian PE/VC performance remained robust throughout the year, though return dispersion across regions contributed to varying results across regions for the period. Strong performance from US PE/VC resulted in its outperformance versus global peers (including Australia), in local currency terms (Figure 5). Australian PE/VC bested European and Asian counterparts in 2020 showing the relative strength of Australian businesses and economy, largely due to the milder pandemic impact experienced. For the 1-year period, Australian PE/VC had meaningfully lower allocations to Information Technology relative to the US which benefitted from the sector’s strong performance.

As of 31 December 2020, the Australian PE/VC index continued to be dominated by four key sectors: Consumer, Healthcare, IT and Industrials (Figure 6). In 2020, the Australian PE/VC Index invested capital into Industrials, Communication Services, Healthcare, Consumer and IT companies and realizations came from companies in the Industrials, Healthcare and Consumer sectors.

Australian PE/VC Index sector “winners” following the COVID19 pandemic included: IT, Consumer Staples and Healthcare (Figure 7), which all contributed positive returns for the full year. The Consumer Discretionary and Financials sectors detracted during the height of the crisis, however the Consumer Discretionary sector recovered meaningfully in the second half of the year to finish with a 1% return. Global PE/VC peers saw similar “winners” in offshore markets during this period, including positive contributions from IT, Healthcare, Industrials and Consumer Staples. While this year-to-date view provides a reference to PE/VC performance during the pandemic, it is a very short time frame of data for strategies that typically manage investments with a three- to seven-year holding period.

Australian PE/VC Looking Ahead

Broadly, Australian PE/VC navigated the COVID19 pandemic well. During the onset of the pandemic, PE and VC managers were quick to respond, intensively and actively working with their portfolio companies to dampen the initial impacts of the global pandemic and access available support from governments and banks. While certain sectors were more affected by the crisis (e.g. retail and tourism), overall, the net impact of these industries were more than offset by stronger performance in sectors that benefitted from the pandemic, such as IT and Healthcare. Looking ahead, as the broader macro landscape continues to improve, supported by fiscal and monetary stimulus, market liquidity, improved consumer and business confidence, as well as pent-up demand, the Australian PE/VC industry is well-positioned to meet return expectations, especially relative to listed assets where valuations have increased considerably. As additional data builds via the Australian PE/VC Index, Cambridge Associates will continue to measure the PE/VC industry and reflect on the impacts to valuation, distributions and investments in Australia and New Zealand.