New York-based investment banking boutique CFC Capital LLC has just released a controversial report in which it argues that private equity usually fails to outperform the public markets.
However, the methodology the report uses is based on a median rather than a pooled return. Still, the median annual return from 1995 through 2000 – arguably private equity’s heyday – averaged only 3.9%, according to the report, which means that most private equity funds delivered a median return that failed to outperform the S&P 500, and even Treasury Bills, during the same period.
Meanwhile, average IRR was roughly 41%, and in 1999, the average IRR weighted by amount of capital was 119%. Yet the median return for this year was just 2.9%, compared with the S&P 500 return of 21%.
According to industry sources, the report grew out of testimony by CFC managing director Arthur Rosenbloom who used the statistics in a suit against a defendant, a fund manager who reneged on a contract. CFC Capital’s analysis was reportedly based on Venture Economics data for the years 1980 to 2000.
However, John Taylor, vice president of research at the National Venture Capital Association, which conducts its industry research from the Venture Economics/Thomson database, said that whatever the results CFC Capital found, he remains skeptical about the methodology the firm employed.
“The median doesn’t really matter, because it’s not real, it’s a fantasy,” he said. “The bottom line is the majority of money is invested by the limited partners in the larger funds. And those are the ones that have had very good returns over time.”
NVCA calculates its data on a pooled basis, “so a $5 billion fund would weight five times what a $1 billion fund would,” said Taylor. “So what you’re actually doing is looking at it from the investor’s point of view for every dollar they put in.”