Before we move on to 2015, let’s take one final look at where private equity stands as of Q4 2014. Using our cash flow data, I compared the pooled net IRR for the 2000 through 2012 vintage years to the Bison PME for the Russell 2000®. I focused on North American and Global funds, where the Russell 2000 could be a relevant public market comp. Funds in this analysis account for close to $1 trillion of committed capital.
Buyout Funds vs. Russell 2000
North American and Global buyout funds have outperformed the public markets in nine out of the thirteen years analyzed.
Buyout funds enjoyed strong outperformance of the public markets from 2000 through 2005. Since then, buyout fund performance has been mixed with four of the last seven vintage years underperforming the markets. The reason for this is two-fold. Everyone knows how funds from these vintages, primarily 2006 – 2008, did some bad deals (think TXU) and have had to lengthen their holding periods to try and recoup their cost (think Freescale). A higher number of bad deals and longer holding periods have clearly hampered returns for these vintages.
What also can not be ignored is the incredible bull market in public equities over the last six years. The Russell 2000 has tripled since it bottomed out in 2009. This is not meant as an excuse for the private equity industry but an acknowledgement of the public market’s incredible, and probably unrepeatable, returns over the last six years.
More recent vintages seem to be showing favorable signs. However, it can be hard to draw definitive conclusions from PME analysis when funds are only nearing the end of their investment period and have not yet had time to mature.
Venture Capital & Growth Equity vs. Russell 2000
North American and Global VC/GE funds have outperformed the public markets in just six of the thirteen vintage years analyzed. However, four of the six years have occurred since 2007 – highlighting the VC/GE market’s recent strength.
The venture industry has also suffered due to the strong public markets while underperformance in the early 2000s can be attributed to the dot-com crash. Compared to the buyout industry, VC/GE performance against the public markets has been mixed, though there are encouraging signs in the more recent vintages.
Compared to each other, the buyout industry has bested the VC/GE industry in eight of the thirteen years. However, VC/GE have outperformed buyouts in four of the last six year through 2012. Whether or not VC/GE can sustain this recent strength will likely depend on their ability to exit these high momentum companies which have seen tremendous valuation increases over the last few years.Read More