Positives of PE don’t make it a safe haven
By Paul Mackintosh - 06/08/12
Preqin’s latest issue of its Private Equity Performance Monitor publication shows that “total assets under management held by private equity funds worldwide has reached $3 trillion for the first time.” And Preqin has also released figures confirming recent Cambridge Associates numbers on PE performance, stating that “annualized horizon returns over 10 years to December 2011 stand at 11.9%, above that of the S&P 500 and MSCI Europe indices,” and that 79% of its latest LP poll felt their PE investments had met or exceeded expectations. All seems rosy in the garden. “The sustained growth of industry assets highlights the fact that private equity continues to be attractive to institutional investors that are willing to forgo liquidity in return for outperformance,” declares Preqin spokesperson Bronwyn Williams.
Forgive the slight tone of scepticism, but it just seems too good to be true that private equity is rising above all the travails of the global economy and other asset classes to enjoy its best period ever. Yes, we all know that we live in a yield-hungry world now, where institutions are ever more ready to look beyond the dismal equity markets to secure returns. But the headline figure obscures the fact that much of the growth in AUM (136%) happened in 2004-07, with the leverage- driven bubble in mega-buyout funds. Those same funds now account for much of the $804 billion in unrealized portfolio assets and $392 billion in dry powder swelling the $3 trillion figure. It would be interesting to know how that book value would hold up if those assets were realized at today’s prices. Not to mention the challenge of investing that $392 billion in the current leverage-starved environment, or exiting assets in the dreadful IPO market.
My concern is that the outperformance of PE and its current popularity have to be seen in the context of the collapse of other asset classes. Private equity is the Iong-term asset class par excellence, and commitments made now will be realized in a very different environment. This total of $3 trillion is a huge wad to put on a long-term bet. And private equity is least likely to work out as a safe haven for investors fleeing volatile equity markets and tarnished sovereigns. “The key issue for investors remains identifying, researching and selecting the best potential fund managers for their portfolios,” concludes Williams. And now more than ever, past results are no guide to future performance. Caveat investor.