With concerns of a slowdown in the global economy, frequent re-evaluation of portfolio allocations has become increasingly important for investors to ensure return targets are met. Preqin’s Private Equity Online is a valuable tool which provides detailed information on the historical performance of 7,937 private equity funds.
The chart above shows that venture capital funds have experienced the greatest variability in their returns. Funds of vintage 2000-2006 delivered a low median net IRR due to inflated valuations in the technology sector during the dotcom bubble. However, venture capital funds of vintage 2006 onwards have shown a steady increase in returns, with 2011 vintage funds achieving a median net IRR of just over 22%. In contrast to other strategies, private equity fund of funds returns have been relatively stable across the period shown, exemplifying the potential benefits of diversification.
Growth funds, however, have proved volatile: 2009 vintage growth funds suffered in the wake of the Global Financial Crisis (GFC), achieving a median IRR of 8%. However, 2012 vintage funds have outperformed all other strategies of the same vintage (+29%).
Distressed private equity funds* across certain vintages exhibited reasonably strong returns. Managers of distressed private equity funds* were able to capitalize on the volume of distressed opportunities created by the GFC, achieving median net IRRs of 17% and 19% for vintage 2008 and 2009 funds respectively.
2011 vintage buyout funds currently have the lowest median net IRR (+13%) compared with other fund types of the same vintage. The latest performance data for 2013 vintage funds shows a median net IRR of less than 2%. Nonetheless, funds of this vintage are still at early phases in their lifecycle, and therefore performance evaluation at this stage should be provisional.
Although historical performance should not be the only consideration of asset allocation decisions, it can highlight how different market conditions affect various strategies of the same asset class. It could also provide a useful indication of how specific fund types may perform in the future.
*Distressed private equity includes turnaround, distressed debt and special situations vehicles.