Private equity and venture capital managers have struggled to keep pace with the bull market in public equities over the last decade, and the level of outperformance for is on the decline, according to new fund performance data for Q4 2017 released by PitchBook.
This lacklustre performance is more exaggerated for VC funds, with even top-quartile VC funds frequently failing to beat the market.
PitchBook’s standalone performance measurement product PitchBook Benchmarks uses public market equivalent (PME) metrics to assess the historical performance of PE and VC funds relative to public equities.
“The S&P 500 has posted gains each year since 2009, including three years with returns more than 20 per cent, which has made it difficult for PE and VC funds to keep pace,” says James Gelfer, senior strategist at PitchBook. “Average returns on an absolute basis for PE funds have fallen due to several factors, most importantly heightened competition that has elevated purchase-price multiples. On the flip side, VC fund performance data shows only top VC funds tend to outperform.”
To provide a more comprehensive picture of how private capital’s relative performance to public equities has evolved, PitchBook calculated individual public market equivalents (PMEs) for each fund included in PitchBook Benchmarks.
For PE funds, top-decile PME level crested at 2.00x for multiple vintages in late-1990s and early 2000s. For more recent vintages (2006 to 2015), PME has averaged 1.34x and hasn’t been above 1.50x since 2005.
Bottom-quartile PME for PE exceeded 1.00x in certain years, underscoring the widespread ability of managers to beat the market.
For VC funds, the median PME is above 1.00x for only five vintages from 1997 to 2015, with four of those occurrences taking place after 2010 (i.e., vintages with mostly paper gains).
The lowest bottom-quartile PME hurdle rate for VC is 0.28x, compared to 0.72x for PE.
