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Long-term private equity performance remains strong despite sharp falls

The long term performance of the European private equity industry remained robust through 2008, despite a difficult exit environment and downward pressure on valuations, according to da

The long term performance of the European private equity industry remained robust through 2008, despite a difficult exit environment and downward pressure on valuations, according to data compiled by Thomson Reuters in association with the European Private Equity and Venture Capital Association.

The performance benchmarks are based on private equity fund performance over the past 29 years and the sample comprises some 1,310 funds.

Net internal rate of return since launch to December 2008 remained strongly in positive territory, at 10.3 per cent for all private equity, with buyout funds returning 14.2 per cent and venture funds returning 3.1 per cent. This compared with performance to the end of 2007 of 12.1 per cent, 16.6 per cent and 4.2 per cent respectively.

Macroeconomic volatility over the past year caused a slump in short-term horizons of 24.9 per cent for all private equity, including a fall of 17.9 per cent for all venture capital and 26.4 per cent for all buyouts.

Within the buyout segment, mega buyout one-year horizons fell 27.1 per cent, compared with a gain of 20.1 per cent in 2007, while small buyouts went from 39.5 per cent in 2007 to a decline of 23.8 per cent in 2008. Mid-market buyouts went from 25.2 per cent in 2007 to a fall of 17.9 per cent last year.

The mid- to long-term performance of buyouts remained strong, on the back of several years of high returns, with three-year net IRR to December 2008 at 8.5 per cent, and the five-year figure at 14.1 per cent. European venture funds broke even over the three-year horizon period while five-year net IRR increased to 2.1 per cent.

Top quarter performance in both buyout and venture remained very strong with a 30.9 per cent pooled average top quarter IRR for buyouts and 13.3 per cent for venture, and 22.7 per cent for all private equity funds.

The sustained long-term performance of the overall private equity industry continued to be superior to the performance of comparable public market benchmarks, the JP Morgan Euro Bonds Index, Morgan Stanley Euro Equity Index and HSBC Small Company Index.

EVCA secretary-general Javier Echarri says: ‘Macro-economic conditions have precipitated a sharp slump in distributions, particularly since 2008, with exit markets particularly difficult. A strong depreciation of values in the near-term have hit one-year return horizons, but European private equity funds have demonstrated a consistently strong performance across a number of years.

‘While extreme volatility prevails in the wider markets, private equity’s long term investment horizon affords it the ability to profit from counter-cyclical opportunities. While IRRs are likely to fall further in the near term for the existing portfolio, those vintages invested in a downturn have historically been those that perform the best.’

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