Investors remain bullish about private equity with average annual return expectations – net of fees, expenses and carried interest – of 11.7 per cent IRR and 1.6x multiple of cost (MoC) for managers that begin investing today.
That’s according to a survey by fundraising and secondaries advisory firm Rede, which reveal that for top-quartile managers this increases to a net IRR of 17.4 per cent and 2.0x net MoC.
The survey included responses from a broad range of investors (pension funds, fund of funds, endowments and consultants) based in Europe, North America and the rest of the world.
According to the survey, investors believe that the difference between selecting a top-quartile versus an average performer is approximately +6 per cent of net IRR per annum and +0.4x net MoC, highlighting the importance of manager selection.
European investors are more optimistic than their North American counterparts in their performance expectations over the next five years, particularly for top-quartile managers, while pension funds are the most optimistic investor type based on mean and top-quartile net IRR predictions, yet endowments and fund of funds are the most optimistic based on mean and top-quartile MoC expectations.
Investors expect operational improvement to be the primary driver of returns, contributing 60 per cent of value creation, with limited contribution from multiple expansion (11 per cent), and some 90 per cent of investors anticipate returns will be the same or lower for funds that begin investing in five years’ time, versus only 10 per cent that thought returns would increase.
Co-investment has become a significant component of many investors’ programmes (76 per cent of those surveyed), with investors anticipating higher net returns from their co-invest programmes than their fund investments.
Commenting on the findings, Adam Turtle, Partner at Rede, says: “Despite concerns around high prices and the continued low interest rate environment, investors generally remain positive about private equity’s ability to generate strong returns over the cycle. This is primarily driven by managers’ capacity to support revenue and earnings growth and is particularly true of top-quartile managers, emphasising the continued importance of strong manager selection. Co-investment, which has become an increasing part of the industry in recent years, features heavily in investors’ thinking, with high expectations for its ability to deliver better net returns.”
