The tremendous interest in European and UK private equity is predicated on the preferred returns that are supposed to accrue to private equity investment. Venture Economics has just published the newest volume in its Investment Benchmark Report series on private equity performance. Venture Economics has recently released a report on private equity performance on US venture capital since 1988 and on US buyout fund investment since 1994. This new volume, the 1997 Investment Benchmarks Report: International Private Equity focuses on the performance of venture capital and private equity funds in the UK and Europe. The report is a joint venture between Venture Economics and Bannock Consulting, a London-based firm specialising in private equity research. Bannock Consulting published the first private equity performance studies for the British Venture Capital Association and the first European Private Equity Performance Pilot Study for the European Commission in 1996.
Fund Composition
The Investment Benchmarks Report on pan-European private equity demonstrates that performance in the UK and European private equity industries is still strong for every investment stage from early-stage to development to later-stage and buyout funds. The study analysed the performance of 280 funds formed from 1980 to 1996. Because younger funds do not generally have realisations, a fact that can distort true performance results, Venture Economics and Bannock Consulting focused on the 202 “mature” funds, or funds formed from 1980-1992. These 202 funds represented ecu 14 billion of the total ecu 21 million committed to the 280 funds in the database. Figure 1 illustrates the composition of the funds in the study by country focus. With the bulk of investments in the UK and Europe done by UK-based funds, it is not surprising that over 40% of the funds were UK-focused funds, with multi-country focus funds representing 43% of the sample by capital committed.
While private equity comprises investments in all stages from early-stage to buyouts, the large part of investment in the UK and Europe is made up of buyouts and MBOs. The sample for this study appears to be representative overall distribution of investments across the different stage focuses, consisting as it does of of 48% buyouts, 32% generalist funds, 16% development stage and 4% early-stage funds.
The objective of the Investment Benchmark Report is to provide the investor community with consistent, accurate and timely benchmarks for the comparison of pan-European private equity investment to peer group analysis as well as other asset classes. It seeks to be representative of investment in European, UK and multi-country pan-European investment. The publication of this study largely satisfies those goals and will be an ongoing project for Venture Economics and Bannock Consulting as future studies try to increase sample representation and to enrich the analysis.
Methodology
The performance is based on the industry standard net returns to investors (IRR) by cumulative returns and by investment horizon. Since independent funds, evergreen and captive investment vehicles were included alongside independent funds, management fees of 2.5% and a carried interest of 20% were applied to captive and evergreen vehicles. All funds were converted into European Currency Units, based on exchange rates at the transaction dates to normalise comparisons. This article will highlight cumulative results since inception to 31 December 1996 and will provide comprehensive statistics for funds in the upper quartiles of their respective investment stage focus categories.
Results
The 1997 study indicates that performance for Continental European and UK mature funds is 18.6% cumulative since inception (Table 2). Results vary between funds of different stage focus, with generalist funds having the highest pooled returns, at 19.4%, closely followed by buyouts funds with 17.6%.
There has been much discussion in recent years on early-stage fund performance. While early-stage funds have a relatively low overall return, at 5.7%, their first quartile results and the performance of early-stage funds in the first quarter are much more robust, showing returns of 13.0% and 27.2% respectively. In particular, the recent short-term performance of early-stage funds is striking: they have returned a spectacular 47.7% for the 12 months ending 31 December 1996 (Table 4). This higher short-term performance is probably indicative of the liquid exit market and levels of IPO activity, as early-stage funds in the US have seen similar short-term performance results. If we measure returns by realised capital, early-stage funds show the highest Total Value to Paid-in Capital (that is, distributed proceeds plus unrealised net asset value) figure of 2.84 times original capital. This again is probably indicative of the short-term performance of early-stage funds, buoyed by the strong exit market of the mid-1990s.
Buyout Funds Still Among Strongest Performers
One result that is not surprising is the strong performance demonstrated by buyout funds. Although they were slightly outperformed by their generalist brethren in the overall cumulative statistics – an artefact of one very large generalist fund which increased the overall returns for this category- buyout funds had the highest realised returns as measured by distributed proceeds to paid-in capital of 0.91 times (Table 3). If we examine results to funds in the upper quarter, buyout funds show an astounding 41.9% return, well above first quarter funds in the other stage categories, whose results were clustered in the 18% to 27% range.
The report demonstrates that overall returns of European private equity investment are encouraging and competitive, with buyout vehicles continuing to show the strong performance indicated by previously published results, and early-stage investment showing some promise of an increase in performance in comparison with the last few years. It demonstrates that there is a place for European private equity in a diversified institutional portfolio. EVCJ
Table 1: 1997 Investment Benchmarks Report
Mature Fund Composition by Country Investment Focus
ECU Millions
Country Focus No. of Funds Committed
Capital
United Kingdom 106 5826
Multi-Country 51 6149
France 21 1175
Spain 8 228
Germany 4 220
Italy 4 190
Netherlands 5 149
Other 3 65
Total 202 14001
Source : Investment Benchmarks Report: International Private Equity
Table 2: Pan-European Mature Private Equity (ECU Based)
Cumulative Returns from Inception to 31-December-1996
Stage Sample Pooled Upper Median Distr/ ResVal/ TotVal/
Size IRR% Quartile% IRR% Paid-in Paid-in Paid-in
Early 27 5.7% 13.0% 4.5% 0.61 0.79 1.40
Development
60 7.3% 13.3% 5.4% 0.76 0.59 1.35
Buyouts 67 17.6% 25.2% 15.5% 0.91 0.66 1.57
Generalist**
48 19.4% 7.9% 1.3% 0.83 1.31 2.14
All Private Equity
202 18.6% 17.4% 6.6% 0.84 1.00 1.84
**note there is one very large evergreen fund in the generalist
category which has made the pooled IRR (a weighted method)
higher than the upper quartile.
Source : Investment Benchmarks Report: International Private Equity
Table 3: Pan-European Mature Private Equity (ECU Based)
Cumulative Returns from Inception to 31-December-1996
Results for Funds in Upper Quarter
Stage Sample Pooled Distr/ ResVal/ TotVal/
Size IRR Paid-in Paid-in Paid-in
Early 7 27.2% 1.17 1.67 2.84
Development 15 18.7% 1.37 0.85 2.22
Buyouts 16 41.9% 1.05 0.76 1.81
Generalist 12 22.9% 0.42 1.49 1.91
All Private Equity 50 29.1% 0.74 1.14 1.88
Source : Investment Benchmarks Report: International Private Equity
Table 4: Pooled returns for Pan-European Mature
Private Equity For Investment Horizons ending
31-December-96
Stage 1 YR 3 YR 5 YR 10 YR
Early 47.7% 16.4% 12.5% 6.5%
Development 19.3% 15.8% 9.5% 7.9%
Buyouts 32.7% 20.1% 16.5% 18.0%
Generalists 24.2% 11.1% 13.5% 21.2%
All Private Equity 27.0% 13.6% 13.8% 18.5%
Source: Investment Benchmarks Report:
International Private Equity
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