PE Panorama: Returns exceed investors’ expectations

18 August 2014   Category: News, Asia, Global, USA   By Paul Mackintosh

Amid a glut of private equity stories, including the news that JP Morgan was trying to sell off its private equity arm and that US buyout firms were lobbying American regulators for fear of a new crackdown on leveraged buyout (LBO) lending, the one item that limited partners (LPs) would probably be most interested in was the report from Preqin that private equity distributions had hit their highest level ever – US$568 billion in 2013, up from $381 billion in 2012. Because after all, what really interests institutional investors in private equity funds is how much money eventually comes back to them, no?

On that score, the industry is looking in particularly good shape. Preqin attributed the improvement in distributions to a far more favourable environment for selling or listing companies, which often had been acquired at a discount shortly after the onset of the global financial crisis (GFC) and now could be sold or floated with a handsome mark-up. As of end December 2013, according to the Preqin numbers, private equity funds overall returned an average of 18% to investors. That kind of average puts the broad industry performance well within the target range where a fairly astute LP investor could realistically hope to get into the mid-to-higher-20s sweet spot, and where private equity as a whole does not have to worry too much about proving its ability to outperform the public markets.

According to the survey in the 2014 Preqin Global Private Equity Report, “77% of investors indicated that they were satisfied with the performance of their private equity portfolios, and a further 13% of investors stated that their returns had exceeded their expectations”. Small wonder with these kind of performance figures, especially after a post-crisis environment where distributions at some points had been very low.

There is also the matter of funds raised, again looking in good shape, as “2013 has seen the highest aggregate amount of capital raised by private equity firms since 2008, with 873 funds reaching a final close and raising an aggregate $454 billion”, as the Preqin report says. So that strong distribution record is being met with an equally strong volume of capital ready to be committed to deals and go forth and multiply. If only that volume of capital could then continue to return an average 18% to all of its investors across the board, without the slightest whiff of a cyclical bubble. One hopes, one really hopes.