Keeping up appearances

By Paul Mackintosh - 06/01/14

The New Year looks to be starting off for private equity with the best possible news. General partners (GPs), limited partners (LPs), research firms and press alike are all reporting a bumper year for the asset class, with some of the key performance indicators – outperformance over and above public markets, and returns to investors. Based on data from Cambridge Associates, private equity firms should be able to return over US$120 billion for the full year of 2013, topping 2012's record total of $115 billion

Firms were admittedly helped a lot by conditions that allowed them to sell or list their investee companies readily. Apollo Management CEO Leon Black said at a conference in April. "We're selling everything that's not nailed down." Meanwhile, Cambridge Associates also found that: "US-based private equity and venture capital funds turned in a solid second quarter, posting returns that matched or bettered the major indices that track the performance of large public companies."

Hoverer, investors may not have been putting in to the same degree as they were taking out. "LP contributions for the first six months of 2013, however, were the lowest for any six-month period since the second and third quarters of 2009," according to Cambridge Associates. While the delayed feedback loop in private equity between investment performance and new LP commitments is part of the secret of the asset class's outperforming success, it leads inevitably to many missing the boat, and complaining about returns on subsequent legs of the cycle.

There is also the nagging worry that this was mostly a question of timing and not value enhancement or even rerating. Private equity investors, GPs and LPs alike, might say that it hardly matters when things are looking at their best and so much money is flowing back into investors' coffers. But it never helped convince uncommitted investors that the asset class is a safe bet to gloss over the distinction between value enhancement and simply good timing. However attractive the returns, that sounds like market timing, and that is something that many other entities, including ones very much exposed to market fluctuation and also much cheaper relatively to invest in than private equity, also do. Private equity needs to maintain the perception that it is more than just a conflux of cheap debt, lucky breaks and other people's money to truly justify its proposition – and perhaps persuade some of those reluctant investors to come down off the fence.