Private Equity Risk-Return Relationships for 2000-2010 Vintages

by Claire McNeil

  • 19 Sep 2013
  • PE

Examining the risk-return relationship of different private equity strategies through the median and standard deviation of net IRR, respectively, can help investors select fund types to match their own risk-return requirements. Preqin’s Performance Analyst tracks the performance of more than 6,500 funds; using this data, Preqin has been able to provide insight into the risk-return profiles of the main private equity fund types.

The investment strategies with the lowest standard deviations are balanced (7.8%), fund of funds (7.6%) and mezzanine (5.8%). The median net IRRs for vintage 2000-2010 balanced and mezzanine funds both hover around 9%, while the median figure for funds of funds is 6.3%.

Natural resources has the highest standard deviation of any strategy at 24.0% and generate a median return of 12.1% over vintage 2000-2010 funds. Early stage and growth funds also both have high levels of associated risk, with standard deviations of around 20%; however, vintage 2000-2010 growth funds yield median returns of 8.9%, and early stage funds of the same vintage years generate lower median returns of only 1.4%. It should be noted that this analysis excludes pre-2000 vintage early stage funds, which generate higher returns to the funds used in this analysis. Vintage 2000-2010 real estate funds have a relatively high standard deviation of 17.6% and median returns of 6.4%.

Vintage 2000-2010 buyout and distressed private equity vehicles have similar standard deviations (15.2% and 14.2% respectively) and both fund type groups post similar median returns of around 12.0%. Venture capital funds of the same vintage years have a standard deviation of 13.1% but generate a relatively low median return of 4.3%. Secondaries and infrastructure funds have similar standard deviations of around 11.5%; however, secondaries vehicles yield higher median returns of 15.2%, while infrastructure funds generate a median return of 9.6%. 

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