October 24, 2024
Private Equity Fund Net IRR Cumulative Distribution
Vintage Years 2010-2020
Why Selectivity Matters
The marketing materials for many private equity funds suggest lofty return targets of 20% (or more!). Have they delivered on those ambitious return targets? An examination of net returns suggests that nearly two-thirds of private equity funds fall short of the 20% return threshold. Many of those funds are concentrated in vintage years or time periods that benefited from robust bull markets. At first glance, this seems like unwelcome news for investors in those funds.
The good news for investors? The majority of private equity funds produced mid-teens or higher net-of-fee returns, where the median was 14.4%. In the context of returns on other assets, this performance is excellent and suggests that the average historical private equity fund beat the performance of global equities by 475 bps, a welcome outcome for private equity investors.
Choose Wisely: Sector Composition Can Impact Performance
Not only is strategy allocation an important portfolio construction consideration, but sector composition within the portfolio is also a key component to proper portfolio management. In this week's chart, we examine the sector composition of private equity deals over time and observe noticeable shifts. The information technology sector has (unsurprisingly) become more popular while we have noticed a decline in the number of consumer discretionary deals in recent years. Sectors such as industrials, health care and financials have neither waxed nor waned in popularity. The upshot? Savvy LPs should keep underlying sector diversification in mind when building their portfolios, especially as some sectors may exhibit more cyclicality than others.
October 10, 2024
Private and Public Infrastructure Returns (2014-2024 Q1)
Infrastructure Builds Historically Resilient Portfolios
In today’s unpredictable market, many investors are seeking stability in their portfolios. This week’s chart shines a spotlight on why private infrastructure stands out as a resilient investment option. Infrastructure is recognized for its potential to generate stable returns with low volatility. But unlike public equities and public infrastructure, which are often swayed by market fluctuations and investor sentiment, private infrastructure assets have historically provided more consistent performance. Additionally, private infrastructure exhibits low correlation with public equities (0.46), public infrastructure (0.35), and even private equity (0.65), offering valuable diversification potential and bolstering portfolio resilience during uncertain times.
Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Index Definitions:
Credit Suisse High Yield Index – The Credit Suisse High Yield index tracks the performance of U.S. sub-investment grade bonds.
MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
DJ Brookfield Global Infrastructure Index – The DJ Brookfield Global Infrastructure Index is designed to measure the performance of companies globally that are operators of pure-play infrastructure assets.
October 3, 2024
10-Year Asset Class Risk-Adjusted Performance
Annualized Time-Weighted Returns as of March 31, 2024
High Sharpe ratio, anyone?
Infrastructure may be a relatively nascent asset class for investors, but it has quickly become a key component in many portfolios due to favorable return characteristics, including low correlation to other asset classes and the potential for both downside protection and an inflation hedge. Our data shows that private infrastructure has historically achieved a notably higher total return compared to public infrastructure alternatives and with lower volatility – even after adjusting for smoothing effects in performance reporting. High Sharpe ratio, anyone?
Sharpe Ratio – The Sharpe Ratio is the average return earned in excess of the risk-free rate per unity of volatility or total risk.
Time-weighted Return – Time-weighted return is a measure of compound rate of growth in a portfolio.
Natural Resources – An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.
Volatility – Volatility is a statistical measure of dispersion of return, specifically standard deviation.
Index Definitions:
Credit Suisse High Yield Index – The Credit Suisse High Yield index tracks the performance of U.S. sub-investment grade bonds.
DJ Brookfield Global Infrastructure Index – The DJ Brookfield Global Infrastructure Index is designed to measure the performance of companies globally that are operators of pure-play infrastructure assets.
MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
September 26, 2024
Dispersion of Buyout IRRs by Fund Size
Ordered by Spread of Returns, Vintages 2013 - 2023
Fund Size ≠ Average Returns
This week we examine the differences in dispersion of small-cap buyout, middle-market buyout and mega/large buyout. Interestingly, the median IRRs do not differ drastically between the three fund sizes, all hovering in the mid-teens. This suggests there is not a strong correlation between fund size and average returns.
Top-quartile, middle-market managers, however, have historically posted stronger returns than their peers in the mega/large space. While top-quartile returns are high, the dispersion of returns for middle-market buyout also remains wide, showing the upside potential and downside risk. That dynamic stands in contrast to mega/large funds, which exhibit a tighter dispersion. This relationship is even further pronounced when looking at small-cap buyout relative to the other buyout buckets. Small-cap buyout displays the highest top-quartile returns, while also having a sizable increase in return dispersions. Strategic planning and prudent manager selection remain crucial to targeting outperformance, especially in small-cap and middle-market investing where the wider dispersion of outcomes can introduce more downside portfolio risk considerations.
SMID Buyout – Any buyout fund smaller than a certain fund size, dependent on vintage year.
Mega/Large Buyout: Any buyout fund larger than a certain fund size that depends on the vintage year.
September 19, 2024
Private & Public Market Cumulative Returns
Q4 2021 - Q1 2024
Marathon-style Performance
Rewinding the clock, private and public markets saw robust growth through 2020 and 2021. That reality drastically changed in 2022 as a result of rates moving higher and a dash of geopolitical uncertainty. Our chart this week looks at the cumulative returns of private and public markets since the last peak in Q4 2021. After a sharp decline to start 2022, public equities rebounded sharply and have performed well, driven largely by a handful of tech-focused, mega-cap names. We observe that, recently, private equity has underperformed public markets in the short run. Buyout outperformance has historically been most pronounced during periods of mediocre or negative public market returns.
Conversely, credit has benefited from the current sovereign rate environment and infrastructure continues to generate respectable yields with cost-passing and capital preservation benefits, showing strong performance relative to publics in both of those asset classes. While public markets may experience sharper movements over short-term periods (< 3 years), we believe private market strategies will continue to outperform in the long run.
DM Buyout – Includes any buyout fund that is primarily investing in developed markets of North America, Western Europe and Global.
EU Buyout – Any buyout fund primarily investing in the European Union.
Growth Equity – Any PM fund that focuses on providing growth capital through an equity investment.
Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Venture Capital – Venture Capital incudes any PM fund focused on financing startups, early-stage, late stage, and emerging companies or a combination of multiple investment stages of startups.
S&P 500 Index – The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.
MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
Credit – This strategy focuses on providing debt capital.
Credit Suisse Leveraged Loan Index – The CS Leveraged Loan Index represents tradable, senior-secured, U.S. dollar-denominated non-investment grade loans.
BofAML High Yield Index – The BofAML High Yield index tracks the performance of below investment grade U.S. dollar-denominated corporate bonds publicly issued in the U.S. domestic market.
Real Estate – Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
2024 Distributions Revisit Pre-2021 Era
We focus a lot on risk and return, but liquidity is another major consideration when thoughtfully constructing private market portfolios. In this week’s chart, we observe the rate of distribution across all private markets as the total amount of distributions as a percentage of NAV. Also shown are the annual amounts to illustrate the magnitude of distributions per year, demonstrating distribution activity in two ways. Investors experienced diminished distribution activity in 2023 compared to the record amounts in 2021 and 2022, and it is unlikely to see distributions of that magnitude based on 1H 2024.
Distribution rates, however, show some evidence of recovery from the all-time lows they saw in 2023, which was the lowest annualized rate of distribution over the past 10 years. This can be attributed to minimal exit activity during that year, but it appears to have begun picking up traction in the start of 2024. Still, the distribution pacing declines are more a function of NAV growth, rather than a massive decline in absolute distributions, as distributions continue to be on pace or exceed those of pre-2021 levels.
September 4, 2024
All Private Equity 10-Year Rolling TWRs
Want Historically Premium Returns? See PE.
For this week’s chart, we explore 10-year annualized returns on a rolling basis. Over a long time horizon, private equity has bested listed equities over most 10-year periods and across various market cycles. In fact, when compared to the MSCI World index, private equity outperforms in every time frame. Even when taking into account the most recent period of public market volatility, private equity continues to substantially outperform.
Private equity outperformance is typically most pronounced during periods of mediocre or negative public market returns. This disparity arises more from the volatility in public markets than from the nature of private markets themselves. When public markets are strong, private equity's outperformance diminishes; in any other environment, it increases. Regardless of market volatility and market cycles, private equity continues to generate premium returns that investors cannot access from listed equities.
Time-weighted Return – Time-weighted return is a measure of compound rate of growth in a portfolio.
S&P 500 Index – The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.
MSCI USA Small Cap Value Index – The MSCI USA Small Cap Index is designed to measure the performance of the small cap segment of the U.S. equity market.
MSCI World Index – The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
Volatility – Volatility is a statistical measure of dispersion of return, specifically standard deviation.
August 29, 2024
Impact of Top and Bottom-Quartile Funds
All Private Markets, Net IRR by Vintage Year
When Saying "No" Can Add 2 – 3%
Top-quartile fund performance can be one of the many drivers in a private markets portfolio. However, there is also meaningful upside to avoiding bottom-quartile funds. Shown this week is the impact of top and bottom-quartile funds by vintage year for all private markets funds. It’s important to note that even without the top-quartile funds (dark blue), on a pooled IRR basis, private markets have still performed quite well.
That begs the question of how much alpha can be added by only selecting top-quartile funds. While this varies by vintage year, the chart illustrates that roughly 3-5% can be added by selecting top-quartile funds. That is a substantial premium that comes with good portfolio management. While everyone strives for the best of the best, what can be said of simply avoiding the bottom-quartile funds? Does that have as drastic of an impact to pooled performance? Not quite; however, roughly 2-3% can be added by avoiding bottom-quartile funds. In either scenario, the importance of portfolio management is evident and careful manager selection – knowing who to choose and avoid – can drastically impact returns.
August 22, 2024
Cumulative Returns During a Crisis
Buyout vs. Global Equities Cumulative Returns
Will M&A Accelerate PE Performance in 2024?
A common question we hear among investors is what to expect from private equity during market crises and downturns. We’ve looked at a few significant market crisis environments: The dotcom bubble in the early 2000s as well as the Global Financial Crisis (GFC) and compared them to equity market drawdowns over 2022 and portions of 2023. During both the dotcom and GFC eras, the public market decline continued well past three quarters and took five to six years to reach breakeven. The downturns in buyout, however, were much more muted than those of the public markets. In addition to taking less of a hit, the private markets recovered sooner than public markets during both crisis periods.
At the start of 2022, we saw another market downturn, though much less severe than previous eras. Private markets once again showed more resilience and muted aspects, including breaking even prior to the publics. But there’s something noticeably different this time around: The sharp rebound in the public markets from 2023 through 1H 2024 has not yet been matched by the private markets. Perhaps a rebound in M&A activity will provide a boost to private markets... It is safe to say, however, that the downturn seen in 2022 is nothing like what we saw in the dotcom bubble or GFC era.
MSCI World Index: The MSCI World Index tracks large and mid-cap equity performance in developed market countries.
August 15, 2024
Sizing Considerations
Distribution of Portfolio Returns - 1 Fund Per Year
Distribution of Portfolio Returns - 10 Funds Per Year
Diversification: Increasing the Likelihood of Success
We’re celebrating Chart of the Week’s first anniversary with one of the charts you all found most interesting over the past year: the distribution of portfolio returns.
The goal of successful portfolio management is mitigating downside risk while creating the best chance of achieving your target returns. Diversification plays a major factor in that success. Here we see the return distribution of portfolios of varying levels of diversification by strategy. The first chart shows the distribution of returns for portfolios investing in one fund every vintage year. The second chart shows increasing the portfolio to invest in 10 funds each vintage. As you would expect, the dispersion of returns is wider for the more concentrated portfolio.
When the number of funds per year is increased from one to 10, the spread of returns tightens drastically. Credit and infrastructure have limited upside potential in this scenario, but they have the tightest dispersion and therefore greatest likelihood of achieving a set return. Narrowing the dispersion in any strategy increases the certainty of portfolio return, which reduces idiosyncratic risk. These figures do not imply optimal diversification but rather illustrate the impact of diversification in portfolios. Importantly, careful manager selection may also increase the likelihood of achieving target returns.
Credit: This strategy focuses on providing debt capital.
Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.
Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
VC/Growth: Includes all funds with a strategy of venture capital or growth equity.
August 8, 2024
Public vs. Private Company Universe
Where $100+ Million Companies Thrive
This chart shows public and private companies with revenue greater than $100 million over the last 12 months.
Private equity can represent a target-rich environment, the market potential of which studies show is larger compared to publicly traded companies.
Globally, there are over 140,000 private companies with annual revenues over $100 million vs. approximately 19,000 public companies with the same annual revenues.
This highlights the breadth of investment opportunities available in the private capital universe, where the opportunity set across different strategies, sectors and regions is likely to be much wider and more available than the public landscape. As such, we believe that private markets offer investors the unique potential to outperform and diversify their overall portfolio.
August 1, 2024
60/40 Portfolio
The New Allocation Blueprint
The 60/40 portfolio has long been the blueprint for a so-called “diversified” portfolio. A 60% allocation to public equity and a 40% allocation to bonds has been shown to provide some ballast and better potential risk-adjusted returns than a 100% public equity-only portfolio.
However, this has not always held true in all market environments. In fact, this may be the outdated diversified portfolio; the “new 60/40” investors are looking to more frequently now includes a mix of private assets as well.
This table shows the return and risk (standard deviation) outcomes of different allocation variations to private equity and private credit, scaling down public equity and bonds in the overall portfolio. Adding some private equity and private credit, we find there is an improvement in the long-term return, risk and Sharpe ratio when compared to the traditional 60/40 portfolio.
Private Equity: A broad term used to describe any fund that offers equity capital to private companies. Sharpe Ratio:
The Sharpe Ratio is the average return earned in excess of the risk-free rate per unity of volatility or total risk.
July 25, 2024
Buyout Deal Value Creation by Sector
Buyouts: GPs Don't Extract Value; They Create It
How do certain sectors generate value for buyout deals? This is a question an investor might contemplate as they construct their buyout portfolios. Unlike public managers, buyout managers actively manage and add value to their portfolio companies by selecting those with strong growth potential and implementing transformative operational strategies.
This week, we outline the general trends of equity value creation across different sectors based on aggregate data from over 6,000 deals. Consumer staple deals generally rely less on value generated via EBITDA growth than multiple expansion and contain less debt at exit vs. other sectors. Financial services companies conversely see more value generated via EBITDA growth than they do from multiple expansion, generally speaking.
EBITDA growth remains the principal driver of total value creation across all sectors. EBITDA multiple expansion can be driven by passive market factors and through GP efforts to grow businesses. Debt paydown is the difference in net debt between the exit and acquisition period, which can shed light on a company’s debt management practices.
Contrary to buyout critics, this data demonstrates that GPs focus on enhancing fundamentals rather than relying on obscure financial engineering or gutting companies to extract value.
July 18, 2024
Dispersion of IRR Returns by Emerging and Established Managers
By Asset Class, Vintages 2010-2021
Emerging Managers' Masterstroke
Should you give a new manager a chance? For this week’s chart, we explore the case for adding emerging managers to private equity portfolios. We define an emerging manager as a GP who is raising a first, second or third institutional fund in their original fund series with fund sizes <$2B.
Observing the dispersion of returns and median IRRs for emerging managers, we note greater variance across private equity strategies. While median returns might be lower than their more established peers, top-quartile emerging managers offer the potential to generate exceptional returns. For investors able to navigate this higher- risk environment, identifying top performers offers attractive access to long-term relationships.
Emerging managers often manage smaller funds and target smaller, niche deals, giving them added flexibility to source deals in less competitive processes. For investors, they offer opportunities to diversify into new geographies and industries. Some emerging managers offer niche strategies that can complement more traditional strategies from established managers. Given the range of returns, having the skill set to identify top-quartile emerging managers is crucial.
EU Buyout – Any buyout fund primarily investing in the European Union.
VC/Growth – Includes all funds with a strategy of venture capital or growth equity.
Venture Capital – Venture Capital incudes any PM fund focused on financing startups, early-stage, late stage, and emerging companies or a combination of multiple investment stages of startups.
July 11, 2024
Five Largest Infrastructure Funds as a % of Total Fundraising
Infrastructure SMIDs = Hidden Gems
In addition to the ballooning average fund size we’re seeing, fundraising concentration at the very top end of the spectrum has increased as well. Despite a challenging fundraising environment, the top five largest fundraises captured a staggering 80% of infrastructure capital raised through 2023, as seen in this week’s chart.
What does this mean for investors? The larger concentration of capital being allocated to fewer large-cap funds has led to higher competition for deals with enterprise values over $2.5 billion. As a result, we believe that lower and middle-market opportunities continue to be an attractive segment due to less competition from an increasing number of large and mega-cap funds which all compete for the same deals.
Learn more in this highlight from our 2024 Real Assets Market Overview.
July 4, 2024
Infrastructure IRR vs. PME
By Vintage Year
Infrastructure’s Historical Outperformance? Check!
This week, we’re taking a look at private infrastructure. We continue to see value in manager selection in this space with top-half strategies adding several hundred basis points of outperformance across vintage years. Like all things in the private markets, we see tremendous value in portfolio construction and careful manager selection. Alpha or not, the asset class has outperformed the public markets every single vintage year since 2012, as seen in this chart.
Downside protection, attractive total returns, low volatility and the potential for additional alpha – what more can you ask for? How about inflation protection as well, because, why not? While the results aren’t fully tabulated yet, early indicators suggest that private infrastructure is checking off many of the boxes on this wish list, especially as we navigate the modern era’s first prolonged period of elevated inflation.
Learn more in this highlight from our 2024 Real Assets Market Overview.
Infrastructure – An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
PME (Public Market Equivalent) – Calculated by taking the fund cash flows and investing them in a relevant index. The fund cash flows are pooled such that capital calls are simulated as index share purchases and distributions as index share sales. Contributions are scaled by a factor such that the ending portfolio balance is equal to the private equity net asset value (equal ending exposures for both portfolios). This seeks to prevent shorting of the public market equivalent portfolio. Distributions are not scaled by this factor. The IRR is calculated based off of these adjusted cash flows.
June 27, 2024
Deal Leverage vs. Gross IRR
Realized Deals from 2012 - 2022
Leverage ≠ Higher Risk, Lower Returns
This week we’re taking a look at a spectrum of private equity investments across their leverage multiple at acquisition and their exit IRR. A lot has been debated on the relationship of the two characteristics. We find, with this analysis, there has not been significant correlation between acquisition leverage multiple and performance. The data runs counter to popularly held beliefs that high leverage levels mean increased risk and lower returns.
Sourcing Outsized Returns
This week we’re focusing on interquartile range of funds’ IRR that are bucketed into three implementation strategies across private equity.
The lowest interquartile range in returns is in secondary funds, highlighting its potential for relatively lower risk implied by lower dispersion in returns. More diversification and robust investment selection in co-investment funds are particularly important to be prudent about and are implied by the highest interquartile range vs. primaries or secondaries.
It is important to note that this is not considering the top and bottom deciles of the dispersion. Although the interquartile range for co-investment funds is higher, the top decile could also be higher, implying both higher expected return and risk. Co-investments also typically show a longer tail on the right of their return distribution, emphasizing the potential for strong, outsized returns if investors have capable sourcing, investment selection and risk management skills.
Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.
June 13, 2024
Duration by Fund Strategy
By Number of Years, For Liquidated Funds
How Long Should You Stay Invested?
Understanding the duration of an investment can be helpful in assessing the illiquidity of closed-end primary funds. In this week’s analysis, we calculate “implied duration” for different private markets strategies. In other words, how much time, on average, is capital at work for a private markets fund?
Infrastructure and credit origination funds demonstrate shorter implied durations – often less than four years. This expedited recuperation period can indicate lower liquidity risk exposures for investors, as capital is returned more swiftly. In contrast, higher risk and returning strategies such as venture capital see an extended duration as their underlying assets take longer to generate and return value.
Understanding the duration of illiquid assets is vital for making proactive portfolio changes that align with an investor’s strategic goals and capital needs. This nuanced approach to portfolio construction is important for LPs seeking to balance their portfolio’s return, risk and liquidity across private market investments.
Credit: This strategy focuses on providing debt capital.
Growth Equity: Any PM fund that focuses on providing growth capital through an equity investment.
Infrastructure: An investment strategy that invests in physical systems involved in the distribution of people, goods, and resources.
Mega/Large Buyout: Any buyout fund larger than a certain fund size that depends on the vintage year.
Natural Resources: An investment strategy that invests in companies involved in the extraction, refinement, or distribution of natural resources.
Origination: Includes any PM fund that focuses primarily on providing debt capital directly to private companies, often using the company’s assets as collateral.
Real Estate: Any closed-end fund that primarily invests in non-core real estate, excluding separate accounts and joint ventures.
SMID Buyout: Any buyout fund smaller than a certain fund size, dependent on vintage year.
Venture Capital: Venture Capital includes any PM fund focused on any stages of venture capital investing, including seed, early-stage, mid-stage, and late-stage investments.
June 6, 2024
All PE Average 4Y Excess Return By S&P 500 Return Regime
Does PE Performance Reign Supreme?
In the spirit of our 2024 Market Overview’s theme Hamlet, we beg the question: To invest or not to invest in the S&P 500? To aid Hamlet’s decision, this week's chart highlights the degrees to which average private equity (PE) four-year rolling performance surpasses S&P returns. Regardless of your expectations for interest rates over the next few years, historical performance indicates that private equity has outperformed public markets. In other words, regardless of who was the President, Fed Chair, or winner of the World Series for the past 30 years, private equity performance has historically rewarded investors with lofty premiums. Talk about consistency!
Private equity outperformance is historically most pronounced during periods of mediocre or negative public market returns. This disparity arises more from volatility in public markets than from the nature of private markets themselves. When public markets are strong, PE's outperformance diminishes; in any other environment, it historically increases. This is because PE tends to be conservative in its valuation practices. GPs might avoid inflating expectations and provide a cushion in their valuations when public markets are rising.
We believe that PE performance will continue to outpace public markets due to key factors such as governance and the alignment of investor interests. PE boards are structured to align with management teams, focusing on maximizing business value. Without the pressure of quarterly earnings calls, management can make medium and long-term investments rather than concentrating solely on short-term operations. That’s a tough act for public markets to follow.
S&P 500 Index: The S&P 500 Index tracks 500 largest companies based on market capitalization of companies listed on NYSE or NASDAQ.
May 30, 2024
Dispersion of Gross IRRs
Realized Deals Only, Deal Vintages 2010 - 2020
Busting Sustainability Myths
This week, we continue with the theme of sustainability. This time, we're showing returns of underlying sustainable deals from the same research as last week. As a reminder, for this analysis we used the UN SDGs for what constitutes a sustainable investment.
What we find is that the return differential is fairly similar across sustainable and non-sustainable deals. This fits with our overall view that sustainable investing will become mainstream and there won’t be a different portfolio set called “sustainable funds.” As investors recognize that sustainable deals do in fact have quite similar return profiles, we believe they will become more common in portfolios over time. There is no evidence that future returns will be reduced by any focus on sustainable investing.