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An Analysis of Private Equity Horizon Returns by Fund Type

by Sophie Park

  • 27 Feb 2018
  • PE
  • VC

Preqin uses quarterly cash flow data for over 3,900 individual funds, in addition to IRR and multiples data for over 9,200 vehicles, to calculate horizon IRRs for a range of timeframes. This enables us to compare the performance of private equity funds to public market indices such as the S&P 500 TR and the Russell 2000 TR.

All indices examined have generated positive returns (above an average of 3%) across each time horizon.

Key Findings:

  • Private equity has performed strongly over one- (+17.3% annualized return), three- (+13.4%) and five-year (+15.4%) time horizons to June 2017; however, the asset class slightly underperformed the S&P 500 Index over the same time horizons, due to stronger market conditions more recently and comparatively lower venture capital returns over a 10-year period.
  • Buyout funds outperformed all four public market indices over a three-year horizon, while the S&P 500 TR Index narrowly surpassed buyout funds by 2.88% and 2.84% over five- and 10-year horizons respectively.
  • Venture capital returns outperformed the Russell 2000 TR Index across the three-year horizon, but underperformed across the one-, five- and 10-year horizons.
  • All indices have experienced relatively low returns over a 10-year horizon to June 2017, which is likely a result of the Global Financial Crisis.

With buyout funds producing greater average returns in comparison to the S&P 500 TR Index across the four time horizons, it is unsurprising that almost half (49%) of investors surveyed in December 2017 felt small to mid-market buyout funds were presenting the best opportunities, a larger proportion than for any other private equity fund type.

*Horizon IRR calculation uses the net asset value (NAV) at both the beginning and end of the period, as well as the calls and distributions in between. Figures are annualized, dollar weighted and net of management and carried interest fees.

As private equity is an illiquid asset class, comparisons with short-term liquid asset classes, such as listed equities, should be viewed in context. Among other factors, investors expect a premium on private equity performance to compensate for the lack of liquidity.

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