Long-term PE performance stable

The European private equity and venture capital industry’s final performance figures for 2004 saw long-term performance remaining virtually unchanged from 2003. The annualised net pooled internal rate of return (IRR) since inception to the end of 2004 is 9.5% for all private equity across Europe, compared with 9.9% in 2003. The long-term IRR figures, compiled by Thomson Venture Economics in cooperation with the European Private Equity & Venture Capital Association (EVCA) and announced at EVCA’s Symposium in London this month, are measured over the last 25 years since 1980.

While long-term returns for all private equity remain relatively constant, the medium-term horizon IRR (five year) has decreased overall compared to 2003’s figures. This is an expected evolution given that the five year horizon IRR still continues to include the high and over optimistic company valuations of 2000. Therefore, five year horizon figures across all stages of development decrease to 2.8% compared to 7.3% in 2003.

However, short-term returns show a continuing upward trend moving beyond a clearly defined inflection point registered in 2002/2003 indicating that industry performance is continuing to make positive progress. The 1-year horizon returns for all private equity stood at 17.7% compared to -0.8% in 2003, with the 1-year horizon returns for venture capital returning to positive territory to 2.0% in 2004 from -8.1% in 2003 and for buyouts to 22.8% from 2% over the same period.

Looking at the returns by stage since inception, buyout and venture capital returned 12.3% and 6% respectively. While buyout returns are almost at the same level as 2003 when they reached 12.2%, venture returns registered a slight decrease compared to 2003 at 7%.

The performance of the top quarter funds (the IRR of the funds performing above the upper quartile) continues to be strong for both venture capital and buyout with the pooled IRR (since inception) of 18.6% for venture capital and 28.7% for buyouts in 2004. Compared with the long-term pooled IRR for each stage, this means that top quarter venture funds outperform the IRR of all venture funds by three times and that the top quarter buyout funds’ return is twice as high as the return of all buyout funds.

Glenn Bedwin, European head of research, Thomson Financial, said: “The solid short-term returns are explained by private equity firms having already written down most of their valuations and now being able to reap the benefits of the improving exit markets. Those returns also reflect the solid performance of European private equity as an asset class, which has consistently outperformed both public equities and fixed income.”