Are the Heydays of Private Equity Over?

Private equity data provider Pitchbook is out with an interesting question – “Is declining fund performance a sign that PE’s good times are over?“.

It’s a question worth asking whether you’re in the private equity sector, or whether you’re an investor seeking to maximize your returns.

Before looking at the return data for private equity funds compared to the market, what percentage of private equity firms would you guess beat the market?  Would you guess it depends on the year in question?  Would you guess there is a long-term deterioration in fund performance?

Make your guesses now, because the results follow.

The Data on Private Equity Funds’ Returns

First,  presented in the following figure are the typical returns of private equity funds for the most recent few years.  Overall, after bottoming in 2009, all fund size have experienced positive returns, generally in the range of 10 to 20 percent.  Not bad, not bad at all.

Source: Pitchbook

The Data on the Percentage of Private Equity Funds that Outperform the Market

Next, what do the data on the percentage of private equity funds that outperform the market look like?  Take a guess before looking.  If you’re marginally aware of the performance of various financial funds, you’re likely aware that the 1980s and 1990s were good times for the private equity sector.  Lots and lots and lots of financial professionals envied the private equity industry for its glamour and ability to provide investors strong returns.

Is that still the case?

The following is a look at the percentage of private equity funds that outperform the market.

Fascinatingly, the picture shows a 1990s return experience that was anything but weak.  At its peak in early 2000, the percentage of private equity funds that beat the market 88 percent, a massive achievement for the smart financiers.

But, some cracks have appeared.  Since peaking, the percentage of funds beating the market has precipitously declined, bottoming in 2008 at 33.9 percent.  Yes, that’s right.  In 2008, the percentage of private equity funds that outperformed the market reached only 33.9 percent.  Not exactly a good place to place your money if you’re a return-maximizing investor.

Unsurprisingly, since bottoming in 2008, the figures have improved slightly, recently peaking at 50.5 percent in 2013.  Since 2013, there’s been a little bit of concern whether private equity can still beat the market like it did in the 1980s and 1990s.

It is, of course, tough to call whether the heydays of private equity are over.  If one judges the issue by net cash flow, the answer is a clear no, investors still think private equity will perform well.  Ah, the world of financial prognostication.

Source: Pitchbook

Conclusion

In a comparison of private equity fund performance relative to the market, one somewhat alarming trend has emerged – the percentage of firms that beat the market has failed to reach above 50 percent over the past few years.  Whether this makes an ongoing trend is anyone’s call, but it does represent a sign of caution for investors in the private equity universe.