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Examining Horizon IRRs by Private Equity Fund Type – November 2014

by Madeleine Stretton

  • 20 Nov 2014
  • PE

Examining horizon IRRs is a standard method of examining how the private equity industry has performed over a defined period. Horizon IRRs are calculated using the fund’s net asset value as a negative outflow at the beginning of the period, any cash paid or received during the period, and the fund’s residual value as a positive inflow at the end of the period. Preqin's Performance Analyst calculates horizon IRRs using cash flow data for over 2,200 private equity funds, allowing us to analyze different fund types and compare performance over set periods. 

Over the one-year period to 31 March 2014, the horizon returns for the main private equity strategies were all positive. Venture capital funds produced the highest returns over the period (27.0%), followed by buyout (17.8%), distressed (16.1%), private equity funds of funds (15.4%) and mezzanine (9.5%). Over the last 12 months there has been an increase in the level of private equity-backed IPOs. This, along with favourable market conditions, has led to higher portfolio valuations, which could explain why venture capital has produced these high level returns over the one-year period.

Moving into the three-year period, the range of horizon returns narrowed slightly, with buyout funds producing the highest returns during this timeframe (14.3%). Mezzanine and distressed funds were at the lower end of the spectrum, producing returns of 8.2% and 9.9% respectively. 

In contrast, the longer term of 10 years to 31 March 2014 shows distressed private equity producing the highest horizon returns (28.6%), which is in line with what is expected from the long-term nature of private equity vehicles. Mezzanine and buyout funds also produced their highest returns over the 10-year period: 17.5% and 22.4% respectively.

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