Risk and Return for Buyout Funds

by Bronwyn Williams

  • 03 Sep 2010
  • PE

Analyzing the risk level of buyout funds by vintage year, it appears that the risk/return trade-off for buyout funds has changed over time. Vintage 1995 and 1996 funds are associated with relatively high risk levels, with standard deviations of returns of over 20% and 30% respectively. Funds of vintages 1997 to 2002 are showing a lower level of risk, at around 15%, and median returns increase steeply between vintages 1997 and 2001. Funds of vintage 2003 have a standard deviation of returns over 30%. Vintages 2004 to 2007 are also showing high levels of risk but the standard deviations decrease with each vintage year, declining from around 23% for vintage 2004 to 18% for vintage 2007. Median returns are low for funds of recent vintages but such funds are relatively immature and their performance and standard deviations are likely to change in the future.

Breaking down the analysis further into mega, large, mid-market and small buyout funds of vintages 1995 to 2007 shows that risk increases for funds of smaller size. For the period observed, mega buyout funds have the lowest standard deviation with the second best median returns, while small buyouts have the highest standard deviation and the highest returns. With standard deviations of around 18% each, mega and large funds are associated with a relatively similar level of risk. Mid-sized and small buyout funds seem to be slightly riskier, as their respective standard deviations are around the 23% mark.

The data in this analysis was compiled using Preqin’s Performance Analyst. Please click for further information about private equity performance.

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