The private equity industry exhibited a quarterly return decline for the fifth consecutive quarter in Q4 2008, according to State Street Corporation’s Private Equity Index. <
The private equity industry exhibited a quarterly return decline for the fifth consecutive quarter in Q4 2008, according to State Street Corporation’s Private Equity Index.
The index is based on the latest quarterly statistics from State Street Investment Analytics’ Private Edge Group and includes more than 1,500 private equity partnerships with aggregate commitments of approximately USD1.5trn.
The return for the State Street Private Equity Index was -16.32 per cent for Q4 2008, which is a near 800 basis point decline from the prior quarter.
Despite the recent declines, the analysis of returns for Q4 2008 generated some positive results.
‘Private equity funds generally held their ground better than public equities during the fourth quarter of 2008,’ says William Pryor, senior vice president of State Street Investment Analytics.
In Q4 2008 the S&P 500 reported a -21.94 per cent quarterly return, while the Russell 3000 reported an even larger -22.78 per cent decline. The 500-600 basis point out-performance of private equity versus public equity during the fourth quarter is notable, given that in Q3 2008 the private equity return was only zero to 30 basis points higher than these two public equity indices. On an annualized basis, the State Street Private Equity Index reported a one year return of -25.76 per cent, outperforming the S&P 500 return of -38.49 per cent for 2008.
While the fourth quarter returns were down across all major private equity strategies, the venture capital funds in the State Street Private Equity Index demonstrated resiliency to public market volatility and declined by only -9.66 per cent.
‘Venture Capital funds, by their nature, tend to be less affected by difficult credit conditions than do buyout, distressed debt and credit opportunity funds,’ says Pryor. ‘In the fourth quarter of 2008, the private equity funds that had the highest exposure to the credit markets, either through highly leveraged portfolio companies or by direct investment in debt securities, experienced the largest losses of any private equity strategy as general partners wrestled with the impact of the global credit crisis on their interim valuations.’
Both domestic and international private equity returns declined in the fourth quarter. Domestic funds in the index reported a -14.69 per cent return and international funds reported a -21.42 per cent return in Q4 2008. Overall, the magnitude of the return changes between third and fourth quarters for domestic funds and for international funds were relatively even, indicative of the global nature of the challenges impacting the current economic environment.
