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An Examination of the Risk/Return of Buyout Funds – April 2016

by Lisa Parker

  • 18 Apr 2016
  • PE

Preqin’s Private Equity Online contains detailed information on the performance of more than 1,800 buyout funds. Using this data, we can analyze the risk/return profiles of mega, large, mid and small buyout funds.*

The chart above depicts the return (median net IRR) and risk (standard deviation of net IRR) of different buyout fund sizes of vintage 2000-2013. As expected, small buyout funds produced the highest return, with a median net IRR of 16.2% – although this was also accompanied by the highest risk (standard deviation of 21.7%). Interestingly, mega buyout funds produced relatively strong average returns (+15.1%) while having the lowest risk profile of the fund sizes examined, with a standard deviation of net IRR of 9.6%. On the other hand, mid and large buyout funds posted the lowest returns, with median net IRRs of 13.7% and 13.6%, respectively. While large buyout vehicles had a similar risk profile to mega buyouts at 9.9%, mid-sized buyout vehicles’ standard deviation was considerably higher at 15.0%.

The size of each sphere illustrates the share of investor capital to each size of buyout fund, illustrating that the largest proportion of capital is held in mega (48%) and large (25%) buyouts, while less is held in mid (19%) and small (9%) buyout funds. However, the most prominent fund size categories in terms of the number of funds are small and mid-sized buyouts, which represent 48% and 29% of vintage 2000-2013 funds respectively, while large and mega funds represent only 14% and 9% respectively.

An example of a recently closed mega buyout vehicle is Advent Global Private Equity VIII; this global-focused vehicle closed at its hard cap target of $13bn.

*Buyout fund size ranges as defined by Preqin:

Vintage 1992-1996: Small Buyout ≤ $200mn, Mid Buyout $201mn-$500mn, Large Buyout > $500mn

Vintage 1997-2004: Small Buyout ≤ $300mn, Mid Buyout $301mn-$750mn, Large Buyout $751mn-$2bn, Mega Buyout > $2bn

Vintage 2005-2015: Small Buyout ≤ $500mn, Mid Buyout $501mn-$1,500mn, Large Buyout $1,501mn-$4.5bn, Mega Buyout > $4.5bn

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