(June 12, 2012)—In 2011, investments in private equity and venture capital in the United States earned a significant premium over those in public equities, a report by Cambridge Associates has shown.
Although public equities had a very strong fourth quarter, over the calendar year private equity and venture capital returned 10.9% and 13.2%, respectively, while investments in public equities earned 8.4%. The report used the Dow Jones Industrial Average, the Cambridge Associates LLC US Private Equity Index, and the Cambridge Associates LLC US Venture Capital Index to reach its findings.
The group concluded that the desirability of private equity and venture capital varied depending on the window of investment. For example, private equity enjoyed a notably higher 10-year return of 12% than venture capital’s 3.3%. Even public equities in that 10-year period saw a higher return than that earned by venture capital. Over longer time horizons, however, specifically the 15-, 20-, and 25-year periods, venture capital frequently outperformed other asset classes by a double-digit margin.
With the equity market roiled by volatility and low interest rates dragging down fixed-income yields, many asset owners are turning to alternatives like private equity and venture capital to secure higher returns. In a recent illustration of the problems associated with an overreliance on public equities, the Board of the Nobel Foundation announced on June 11 that it would cut the winnings it offers to prize winners by 20%. The foundation has been overweight public equity since the end of 2007, and as a result has suffered from insufficient returns. It is now moving to shift more of its allocation to alternatives.
To see Cambridge Associates’ data, click here.