Horizon Returns: Private Equity vs. Public Markets

by Darren Fernandes

  • 28 Mar 2017
  • PE
  • VC

Preqin’s Private Equity Online encompasses quarterly cash flow data for over 3,400 individual funds in addition to IRR and multiples data for over 8,600 vehicles. Using this data, we can compare the performance of private equity funds with that of the public market by calculating horizon IRR returns for a range of timeframes.

Key Findings:

  • The private equity asset class achieved a 6.9% IRR in the one year to June 2016 (the latest data available), surpassing the S&P 500 TR by 290bps.
  • Over the 10-year period, the S&P 500 TR outperformed the private equity benchmark slightly; however, private equity includes venture capital which posted comparatively low returns over this period.
  • Venture capital funds did outperform the Russell 2000 TR across the one-, three- and five-year horizons.

In terms of strategy, buyout funds have been the top performers, surpassing the private equity benchmark across every period and also outperforming the S&P 500 TR over the one-, three- and 10-year horizons. Given the strong returns seen for this strategy, it is perhaps unsurprising that in Preqin’s Investor Outlook, H1 2017, 58% of surveyed investors identified a subset of buyout funds (small to mid-market) as the fund type presenting the best opportunities in the market.

Despite concerns over high valuations associated with private equity investments, investors, buoyed by record distributions in recent years, are optimistic that the strong performance of the asset class will continue: 94% of surveyed investors intend to either increase or maintain their private equity allocations over the long term. With record levels of dry powder in the market and appetite for the asset class high, it will be down to fund managers to find ways to put capital to work and attempt to maintain the strong returns seen in recent years.

*Horizon IRR is calculated using the net asset value (NAV) at both the beginning and end of the period, as well as the capital called up and distributed in between. Figures are annualized, dollar weighted and net of management and carried interest fees.

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