The overall private equity horizon IRR for the one-year period to September 30th, 2009 stands at -9.2%, an improvement on the -24.1% posted as on June 30, 2009, according to Preqin, a London-based research house that tracks the private equity space.
Preqin has analysed the net-to-LP performance data for over 4,900 private equity funds of all types and geographic focus. In terms of aggregate value, this represents around 65% of all capital raised.
The one-year returns for the Standard & Poor’s 500, MSCI Europe and MSCI Emerging Markets were -6.9%, 1.6% and 19.0% respectively. Over the three-year period, the private equity horizon IRR is 3.6%, while the figure for the five-year period stands at 20.0%.
However, one needs to factor in that private equity remains an illiquid investment class, and horizon returns are therefore not as relevant as they are for listed equities. Preqin has analysed the net-to-LP performance data for over 4,900 private equity funds of all types and geographic focus. In terms of aggregate value, this represents around 65% of all capital ever raised.
Mezzanine Worst Performer
Due to the huge valuation mismatch between the promoter’s and the PE investor’s expectations, a lot of mezzanine deals (a mix of debt and equity) were seen in the recent past.
The report added that PE returns improved between June and September 2009, but all private equity strategies were still posting negative one-year returns as on Q3 2009. With a horizon IRR of -17.1%, mezzanine is the worst performer, followed by fund of funds with a horizon IRR of -12.0%.
Buyout funds are posting one-year returns of -11.2%, still deeply in the red but a significant improvement on the -28.0% posted in Q2 2009.
Private equity returns have changed significantly over the last couple of years and that is indicative of the economic conditions that the funds were operating in. During the boom years (2007), the one-year horizon IRR for all private equity, which stood at 26% in December 2007, rapidly decreased during the following quarters. According to the data in the report, the IRRs then became negative during Q3 2008 reaching -11% in September 2008, and reached its lowest point, -30%, in March 2009.
As of September 2009, the one-year return remains negative but has improved quite significantly from previous quarters, moving from -30% in March 2009 to -24% in June 2009 and -9% in September 2009.
Private equity IRRs should usually follow a J-curve trajectory, with returns being negative in the early years of a fund’s life, increasing over time as investments are exited, and then stabilizing in the final years of the fund’s life. The financial crisis has distorted these J-curves so that some could now be better described as W-curves, the report said.
Private equity saw one of its most turbulent periods beginning with the sub-prime mortgage crisis in 2007, followed by the collapse of Lehman Brothers a year later, and the ensuing market instability, which persisted into the first quarter of 2009. The industry is, however, showing improvement.
“As anticipated with the rally seen in the public markets in Q3 2009, private equity funds have seen their performance improving during Q3 2009,” said Etienne Paresys, Head of Research, Preqin.