Performance measurement survey

]Private equity funds were once again confirmed as the place to be for the long-term investor, outperforming total UK pension funds' assets, as well as the FTSE All-Share, according to a performance survey of all BVCA member firms undertaken by PricewaterhouseCoopers. According to the results, UK private equity funds returned 20.1% per annum to investors over a 10-year period. Performance over a shorter period of time was even more impressive at 38.8% over three years and 27.3% over five years. However, John Gripton, managing partner at private equity asset manager Capital Dynamics says, "I cannot stress enough that you need to look at returns over a long period. You cannot tell what returns are going to be after one or two years." This said, the increasing practice of marking to market rather than at historical cost has given LPs an incentive to look to the secondary market in order to generate early liquidity. But as Gripton points out, "An LP (selling on the secondary market) would still have to take a discount at what are already under-valued prices."

Large buyout funds continue to lead the performance figures, with 1996 vintages and onwards generating an aggregate 23.7% IRR to December 2007. Post 1996 mid-market buyout funds have also performed well over a 10-year period, returning an aggregate 14.6% IRR to investors. For 1996 and 1997 all-fund vintages, the most recent where 10-year performance can be measured, the IRR was 19.6% and 16.4% respectively. 'If you get 15-20% over a 10-year period, that's going to beat almost anything else in your portfolio,' says Gripton. However, signs of a slow-down and decreasing returns can be identified. The 34 funds closed in 2006 have generated an IRR of 7.2% to December 2007. This compares unfavourably to the previous years' vintages, where performance after the first full year generated an IRR of 24%. Although 2004 vintages registered a negative return to December 2005, the frothy market up to summer last year has seen these funds generate a 41.1% IRR to December 2007. Funds closed in 2006 which invested at the height of the market will not have the same access to leverage and pushing returns up will therefore be more challenging.

As has been the case for a number of years, when it comes to fund performance the statistical elephant in the room is venture. This latest survey is no different and shows that venture funds raised since 1996 saw a drop off in performance from December 2006 to the end of last year, declining from -0.6% to -1.6%. However Gripton believes the long awaited venture resurgence could be close at hand. 'The technology has never been in question, it is capitalising on the technology which has been the challenge previously. The fundamentals are in place and the space now has serial entrepreneurs who can generate the returns,' although he concedes that the 'exit market is still an issue.'

Although on the surface a great advert for private equity, the survey does reveal a problem at the heart of the industry - the out-performance of large buyout funds relative to their small and mid-market peers. With a small number of players able to generate the 20%+ returns in recent years, demand for these vehicles has far outweighed supply. This enabled funds to accumulate ever-larger amounts of assets, which put them in the driving seat when it came to dictating terms and conditions to the banks. We are now beginning to see the consequences of this. In addition, large buyout funds have billions in un-invested cash and LPs will be the first in line to feel the pain of lower returns and less frequent distributions.

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• Topics
• Performance
• UK / Ireland