28 Apr 2023

A refresher on relative returns

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In the past week or so there has been some public debate about the industry’s performance, instigated by recent articles in the Financial Times. As the data collection for the BVCA’s 2022 Performance Measurement Survey draws to a close, Suzi Gillespie, BVCA Head of Research, takes a look back at the results from previous years.

Private equity and venture capital funds are long term, illiquid investments, requiring investors to commit capital to funds for a period of time which may be up to 10-12 years. Fund managers select, invest in, improve and ultimately sell businesses with the objective of generating returns for their investors.


What do returns look like over time?

The BVCA’s Performance Measurement Survey contains data from 1980. We run an annual survey of our members to collect data on cashflows and year end valuations to allow us to present a detailed, proprietary study on returns generated for investors in UK managed funds.

Our latest published results, which contain data to 31 December 2021, show that funds which started investing since 2012 generated a since inception return of 22.6% per annum. Across the industry as a whole since 2012, investors own assets which, if realised at their 31 December 2021 values, would mean investors receive more than double their original investment.

For those who love the data, the chart below shows the returns by vintage year (year of first investment) over time.


Since inception IRR (%) by vintage year to December 2021



Since inception multiples of invested capital by vintage year to December 2021



The importance of relativity

However a very important question for an investor is not just the absolute amount an investment returns, but how it compares to other alternatives. We use our data to look at this in two ways.

Firstly, we compare the horizon returns (returns over a specific time period) from funds in our dataset against key UK market indices. Given the fund investment horizon of 10 years or so this is a reasonably good benchmark.

Our 2021 study found that the 10 year horizon return for the UK managed funds in our dataset generated a return for investor of 17.5% p.a., compared to return of 7.7% p.a. generated by the FTSE All Share.

Secondly, for the past two years we have used our Performance Measurement Survey dataset to produce a Public Market Equivalent (PME) analysis. These types of analyses, developed by leading academics and industry practitioners, enable a comparison of the returns from private capital funds to public markets by standardising the timing and amount of the investments.

Using two PME measures (KS-PME and PME+ for those interested – PME+ shown below) we find that collectively the funds in our dataset which started investing every year from 20011 onwards outperform both the FTSE All Share and MSCI Europe indices.


Since Inception Capital Dynamics IRR and PME+ by vintage year



Navigating choppy waters

We are currently close to closing the data collection for the next edition of the survey, with data to 31 December 2022. It will be interesting to see how returns have moved given the economic turbulence throughout the past year. While returns are never guaranteed, investors in private equity and venture capital funds can take some comfort from this historical data which demonstrates that even through private equity and venture capital fund performance dropped during the financial crisis years, it still outperformed public market benchmarks.

At the BVCA we know that our members will continue to work with current investee businesses to support them through this changing time – providing expertise, connections and capital to enable management teams to navigate the road ahead.

The BVCA’s Performance Measurement Survey 2022 will be published later in the year. Many thanks to all our member firms who contribute data.

 

Suzi Gillespie
Head of Research, BVCA

 


1 2001 is the first year for which both indices are available

Sources:


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