Good returns in 2006

While many are panicking about the state of the debt markets and what this will mean for private equity returns, research from SCM Strategic Capital Management confirms the private equity industry remains strong and capable of weathering any storm.

Activity in 2006 was strong both in terms of fund raising and new investments. In Europe, where public markets posted another year of very strong performance, private equity returns stood at 21.1% for the year, an outperformance of just 1.1%. The US again stole the limelight with one year returns standing at 24.3% and outperformance reaching 10.7%. while buyouts are still driving performance, both the US and Europe witnessed an improvement of venture capital returns that saw a return of five year venture capital IRRs into positive territory in both markets.

The positive performance figures for the industry also continue to be driven by realisations that equalled or exceeded new drawdowns for the third consecutive year.

But a closer look at the average performance in each quartile confirms that even the strong tide that has characterised private equity returns did not lift all boats. By way of example, the average ten-year top quartile performance of European buyouts stood at 35.3% while the average 4th quartile performance was still in negative territory with a 10 year IRR of -6.7%. The 10-year IRR gap between the average top quartile and 4th quartile buyout funds reached 41.9% annually. This serves as a warning for latecomers to the asset class whose desire to be part of it all takes priority over a disciplined approach to manager selection. SCM data shows that at least the top quartile funds in Europe achieved attractive returns although it is useful to bear in mind that those figures are mainly driven by pre-99 vintage funds.