An analysis of UK private equity fund performance against the public markets
The British Private Equity & Venture Capital Association (BVCA) has today published a report that explores UK private equity’s fund performance relative to the public markets. The report can be found here.
One of the common problems that institutional investors often face is how to compare and benchmark the performance of different asset classes. The irregular and discretionary nature of a private equity or venture capital fund’s cash flows means that its performance is not fully and directly comparable with the buy-and-hold returns generated by publicly quoted equities.
This report applies the Public Market Equivalent (PME) approach – which effectively mimics private equity’s irregular cash flows via creating a hypothetical investment vehicle that purchases and liquidates its holdings in the public markets – to underlying private equity and venture capital fund data collected as part of the BVCA’s 2012 Performance Measurement Survey.
Highlights include:
The since-inception pooled internal rate of return (IRR) covering all of the 428 PE/VC funds in the analysis was 14.0% per annum, as of December 2012. This compares favourably with the performance of the public market with a PME of 7.4%.
Those funds that began investing after 1996 – the majority of which are still active today – have outperformed public indices around two times over, with returns of 13.1% over the period compared to 5.7% for the PME.
Funds investing across the buyout space delivered double-digit returns on a since-inception basis with the outperformance gap most noteworthy for small-MBO focused funds.
The best returning fund vintages originated from 1994 (34.3%) and 2004 (25.0%), while those that drew down capital at the turn of the millennium also generated robust outperformance.
Joe Steer, Director of Research the BVCA, said: “Comparing the returns of the public market with that of private equity and venture capital is a common problem faced by investors but is not always as straightforward and simple as it seems. The Public Market Equivalent approach allows for a more accurate and true like-for-like comparison. This study points to a strong overall and persistent outperformance by private equity and venture capital relative to the public market and underscores the long-term nature of the asset class as an essential component of an investor’s portfolio.”
Notes to editor
- The full study can be found here.
- The BVCA Performance Measurement Survey 2012 can be found here and the summary report here.
- The British Private Equity and Venture Capital Association (BVCA) is the industry body for the UK private equity and venture capital industry. The BVCA has over 500 member firms, representing the vast majority of UK-based private equity and venture capital firms and their advisers.