Private equity benchmark returns have begun a descent from their post-pandemic high as a new macroeconomic reality of geopolitical tension, interest rate rises and recession bites.
• Average benchmark returns have fallen from their double-digit high in early 2021
• The decline looks set to continue into 2022 with more scope for returns dispersal as market turmoil increases
• There will be a ‘reckoning’ of private equity funds which failed to diversify or recession-proof their portfolios
Private equity benchmark returns have begun a descent from their post-pandemic high as a new macroeconomic reality of geopolitical tension, interest rate rises and recession bites.
Average global returns fell to 6.8% in Q3 and 7.7% in Q4 last year, down from a historic high of almost 15% in the first half, according to data from PitchBook.
The decline is expected to continue through 2022, according to research by Private Equity Wire.
Preliminary data from PitchBook for Q1 2022 shows benchmark returns to be as low as 1.6% and a survey by Private Equity Wire during June reveals a pessimistic outlook for performance in the asset class.
Almost half of respondents to the survey expect to see a decrease in returns for their buyout strategies in the second half of 2022. The findings were examined in Private Equity Wire’s latest Insight Report.
“There’s absolutely no doubt that asset classes are being impacted [by a slower dealmaking environment and an adjustment in valuations] and it’s going to continue like this,” says Jean-Baptiste Wautier, partner and chief investment officer at BC Partners. “There will be a bit of a mourning period, risk will reprice and then things will start back up again but this is exactly where we are right now.”
Even for those seeing no impact yet on their fund returns, there is a growing sense of caution around how the remainder of 2022 will play out.
“Private equity has been an enduring and growth asset class and continues to outpace over time, by and large, the public markets,” says Hythem El-Nazer, managing director at US-based private equity firm TA Associates. “However, I think there’s likely to be a real reckoning of private equity firms. Not everybody is created equal, and with a more challenging market backdrop, firms will need to generate differentiated value in order to sustain top quartile returns.”
Although the fall in benchmark returns during H2 2021 has been significant, the figures for Q3 and Q4 are still above the 10-year average for the asset class. However, there is likely to be a wider dispersal within those numbers and more losers will emerge during the second half of 2022.
“I’d like to just hold breath on the impact until we get to Q4 2022 because I think by then you will start to see everything wash through,” says Simon Finn, managing partner at Intriva Capital. “At the moment there’s more downside than upside, but we see opportunities and remain acquisitive.”
Fund managers also agree that private equity investments with a three- to seven-year horizon are typically stress-tested under a recession scenario and although a public market correction does influence private market valuations, it is not a direct correlation.
“There’s really no tactical change we have made because a recession shouldn’t be a surprise to anyone,” says Nils Rode, chief investment officer at Schroders Capital. “Private equity should be more resilient than the public markets [and] I believe we will benefit from the strategy bias and the sector bias that we have in our global diversification. We are sleeping well.”
Key Takeaway: Larger private equity funds will have prepared for a recession and remain diversified by vintage year and sector but they will face more pressure to sustain top quartile returns in 2022
