Australian Private Equity and Venture Capital – Strong Performance as the Global Pandemic Endures

Eugene Snyman – Managing Director, Cambridge Associates
Margaret Schlott – Senior Investment Director, Cambridge Associates
Isaak Woods – Investment Associate Cambridge Associates

Performance Highlights June 2020

  • Industry Snapshot: The Australian private equity and venture capital (PE/VC) industry is significant, with $30 billion of capital raised to date. Year to date 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 June 2020, the industry invested $1.0 billion and distributed more than $1.0 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 Index for the 5, 10, and 20-year periods ending 30 June 2020 – tracking between +2.0% and +8.9% ahead of the listed market. Long-term performance of the local market (over 20 years) remains ahead of global peers, while mid-term performance (over 5 and 10 years) lags due to individual market factors.
  • PE/VC amid COVID-19: Australian PE/VC performance held-up well for the year to date (as measured through 30 June 2020), besting listed markets over this period and the trailing one-year. Among global peers, Australian PE/VC was in line with Developed Europe and Asian PE/VC and lagged strong returns from US PE/VC. Over the one-year ending June 2020, performance lagged global peers, primarily due to market-specific factors, including a lower relative allocation to information technology in the Australian PE/VC market.

Industry Snapshot

The Australian PE/VC index represents a well-established industry and a significant pool of capital and net of fees strong distributions to investors. At the end of Q2 2020, the Cambridge Associates Australian PE/VC Index represented $29.4 billion of capital raised by 108 PE/VC funds. Over the 20-year period of data captured by the Index, the industry has invested $24.6 billion (+$977 million year to date 2020) in Australian and New Zealand companies, returning $28.2 billion (+$701 million year to date 2020) net of fees back to investors and still holding unrealised investments valued at $9.1 billion (essentially in line with value at the beginning of 2020). This universe is historically dominated by buyout and growth equity strategies, representing 93% of total capitalization, while venture capital funds represent 7% of the index by capitalisation. In the second quarter of 2020, buyout and growth equity funds provided nearly all of the distributions to investors. By net asset value as at 30 June 2020, buyout and growth equity accounted for 80% of the index, with 20% in venture capital.

Over the one-year ending March 2020, the industry invested $1.0 billion into Australian and New Zealand companies, slightly below capital deployed in prior years, which have averaged $1.3 billion per year (since 2009). Investors received net of fees distributions of $1.1 billion from Australian PE/VC managers over the one-year period, lower than the average $2.3 billion per year since 2016.

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 +4.5% to +5.7% and the ASX Small Ordinaries Indices by +2.0% to +8.9% on a public market equivalent (mPME) basis. To measure mPME, Cambridge Associates compares 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 even greater absolute return 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 17%+ annualised returns over 5-, 10-, and 20-year periods ending 30 June 2020. This universe exceeds returns of the broad Australian PE/VC industry by +4.9% to +7.2% per annum over time, while also outperforming the ASX 300 Index by +8.7% to +12.6% and the ASX Small Ordinaries Index by +7.9% to +15.4% 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 exceed US and Asian PE/VC peers and lag European PE/VC over 20 years (Figure 3). Over 5- and 10-year periods, Australian performance lags global PE/VC, reflecting local market factors including interest rates, valuations, market depth and sector exposures.

Australian PE/VC as COVID Continues

In the limited time frame with which to measure the performance impacts of COVID-19, it has been a tale of two quarters. While the Australian PE/VC Index is down -3.0% for the year to date through 30 June 2020, it continues to best the mPME of public indices by +7.0% (ASX 300) and +5.4% (ASX Small Ords) for the period (Figure 4). The second quarter (ending 30 June 2020) saw a quick and strong rebound in performance of listed markets and the Australian PE/VC index also posted a positive return for the quarter (+3.6%), though lagged public markets. However, the compounding effect of lower volatility from the PE/VC index contributed to the aggregate outperformance versus listed peers for the year to date. For the 12 months ending 30 June 2020, the Australian PE/VC industry outpaced the ASX 300 Index and the ASX Small Ordinaries Index by +7.6% and +5.4% respectively.

While it is useful to measuring the industry 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.

Though Australian PE/VC performed in line with global developed PE/VC markets, in local currency terms during the first quarter (Figure 5), performance dispersion across regions in the second quarter contributed to mixed results across regions for the year to date (through 30 June 2020). Strong performance from US PE/VC resulted in its outperformance versus global peers (including Australia). Australian PE/VC lagged global peers over 1-year ending March 2020, similar to the 5- and 10- year periods referenced above. In the one-year period, Australian PE/VC had significantly lower allocations to Information Technology relative to global peers which benefitted from the sector’s strong performance.

As of 30 June 2020, the Australian PE/VC index continued to be dominated by four key sectors: consumer, healthcare, IT and Industrials (Figure 6). For the year to date 2020, the Australian PE/VC Index invested capital into industrials, communication services, healthcare, consumer and IT companies and realisations came from companies in the industrials, healthcare and consumer sectors.

In the early days of COVID-19, Australian PE/VC Index sector “winners” included: IT, industrials and healthcare (Figure 7), which all contributed positive returns year to date. Consumer and financials sectors detracted during the two-quarter period and amid the height of the initial lockdown restrictions. Global PE/VC peers saw similar “winners” in offshore markets during this period, including positive contribution from IT, healthcare, industrials and consumer staples. While this year to date view provides a reference to PE/VC amid the Pandemic period, it remains reasserting that 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

During the second quarter PE and VC managers were able to shift from the early and immediate liquidity planning and stabilisation for portfolio companies to access government initiatives, such as JobKeeper, which continues to support affected companies. Beginning to play out more clearly is a dispersion of sectors and company impacts as a result of the pandemic, in the data and real time. In some sectors, timeframe for expected exit has been extended by +6 to +18 months, while exits are being pushed forward in other sectors and companies to capture accelerated growth. PE and VC are expected to continue to play a portfolio role of dampening volatility relative to listed markets, while positioning companies for and providing investors with long-term growth opportunities. This is coupled with the investment opportunity going forward for PE and VC managers as markets reopen and M&A returns. 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.