Private equity exits its golden age

UK private equity funds recorded impressive returns of 20.1% for the 10 years up to the end of the 2007, according to the latest annual survey from the British Private Equity and Venture Capital Association (BVCA).

This compares with returns of 6.2% for the FTSE All-Share index over the same period and a 7.1% average return from total pension fund assets.

Simon Walker, chief executive of the BVCA, said: “Private equity is all about providing long-term capital to business, so returns over the long-term are what really count. These excellent performance figures show why so many pension fund trustees and other institutional investors want to invest in private equity.”

The survey was conducted in association with PricewaterhouseCoopers and Capital Dynamics, and collates responses from 422 UK-managed private equity funds, excluding quoted private equity investment trusts and venture capital trusts.

John Gripton, head of investment management Europe of Capital Dynamics, describes private equity as having been through a “golden period”. Top carat gold, in fact, as the survey shows that up to the end of 2007, five-year returns were 27.3% and three-year returns were 38.8%.

To some extent, these high, shorter-term returns will have been driven by recapitalisations. Gripton says: “Recapitalisations have mitigated the effects of the J-curve, but it has now become much more difficult to get recapitalised,” he says.

The reported returns are based on realised and unrealised values. The value of some companies has been realised within the private equity market through secondary or tertiary buyouts; Gripton explains that different sized funds have the appropriate capabilities to develop an investment. And the survey shows that it is at the top end where the best returns are being made.

Large MBOs delivered returns of 23.9% over the 10-year period, compared with Mid MBOs (14.6%), Small MBOs (9.1%) and Venture Capital (minus 1.8%).

The low returns on venture capital and technology in particular (which as a sub-category, delivered returns of minus 2.5% over the 10 years) are a separate issue, says Gripton, which he expects to change. “We now have more experienced fund managers, entrepreneurs and good managers,” he says.

As for private equity’s exit from a golden period, Gripton anticipates: “We are moving back to a period where returns of 15%–20% are deliverable over long periods.”