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Private Equity Horizon IRRs vs. Public Indices

by Etienne Paresys

  • 10 Jul 2009
  • PE
  • RE

Private equity has historically demonstrated consistent and stable performance, but more recently returns have experienced rapid changes due to the current financial crisis and the introduction of FASB 157. In today’s fast changing environment, horizon IRRs offer a good indication of industry trends and developments.

The one-year horizon returns as of December 31, 2008 show that, with the exception of mezzanine, all private equity strategies produced negative returns on average. Taken as a whole, the private equity industry posted returns of -27.6% over the last year. This poor performance was mainly driven by private equity real estate, with returns of -39.9%, and buyout with -31.0%. Venture capital and fund of funds were somewhat less affected, showing one-year horizon returns of around -15%. With 4.0%, mezzanine was the only private equity strategy that posted positive performance. Medium- and long-term rates of return are still showing strong overall performance, with 11.3% net returns over a three-year period and 20.9% over five years.

Compared to public indices, private equity is still generating better returns. As of December 31, 2008, the one-year returns for the Standard & Poor’s 500, MSCI Europe and MSCI Emerging Markets were -37.0%, -46.4 and -53.2 respectively, compared with -27.6% for private equity. Horizon IRRs for all private equity are also beating these public indices over the three- and five-year periods. All public indices are posting negative returns over a three-year period, while private equity is still showing positive performance at 11.3%. Private equity has certainly been affected by the current crisis, but to a lesser extent than listed equity. This confirms that private equity is one of the best performing asset classes available to investors.

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