Stable Returns, Through Good Times And Bad

When it comes to charting U.S. buyout market fund-raising, think Mount Everest. Back in the 1990s, spike-booted U.S. buyout firms raised more and more money every year, almost without exception.

By 1998, they raised $55.5 billion, nearly ten times as much as they had raised six years before, in 1992. The year 2000 saw a near-term peak, with more than $60 billion raised, before tumbling back to the low double-digit billions in the early part of this decade. Most of us remember the top concerns of limited partners during the steep climb. Too much money chasing too few good deals. Too many second-rate teams driving up prices for the disciplined. The venture capital fundraising market went through a similar rise and fall, though too few sounded alarms at the summit.

Needless to say, venture returns tumbled in the early 2000s, along with the pace of fundraising. Too much money had sloshed around for the available supply of viable start-ups to effectively absorb it all. But buyout firms continued to churn out steady, admirable returns, paving the way for the current boom. An analysis of the performance of the U.S. buyout fund portfolios of the California Public Employees’ Retirement System, Oregon Public Employees’ Retirement Fund, and the Washington State Investment Board shows a remarkable consistency for vintage years 1994 to 2002, even as fundraising climbed then plummeted.

Here’s how I analyzed the numbers. From the Web sites of these three pension funds, I took relevant data—vintage year, commitment size, distributions, value of remaining holdings, multiple, net IRR—for U.S. and global-strategy buyout funds and entered them into a spreadsheet. Then I grouped the funds by vintage year, eliminating duplicates. This left me with samples of anywhere from nine funds for vintage year 2002 to 19 funds each for vintage years 1998 and 2001. Then I determined the overall investment multiples of these vintage year funds by adding up the distributions and value of remaining holdings, and dividing by the amount invested.

The investment multiples achieved by funds during these vintage years occupy a surprisingly narrow range. They vary from 1.3 in 1998 to 1.7 in both 2000 and 2002. And the numbers don’t seem to correlate at all with the pace of fundraising. True, the banner fundraising year of 1998 corresponded with the low-point in investment multiple; but the even better fundraising year of 2000 took home the crown, generating a multiple of 1.7.

Not surprisingly, I found a far larger spread in performance when looking at median net IRRs. But again, no Mount Everest in sight. More like a bowl, starting with 13.8 percent in 1994, falling to a low point of 4.8 percent in 1996, then rising to a high point of 23.1 percent with the 2002 vintage year. As with investment multiple, vintage 2000 funds, raised during the near-term peak in fundraising, did particularly well, achieving a median net IRR of 17.9 percent, second only to vintage-year 2002.

Consistency of performance seemed to be the common theme no matter how I sliced the numbers. CalPERS, Oregon and Washington each have markedly different portfolios of buyout funds with relatively little overlap. Yet each has posted similar performance numbers. Based on my analysis, CalPERS has an 82-fund portfolio (pre-vintage 2003) dating back to 1990; Oregon has a 49-fund portfolio dating back to 1981; and Washington has a 47-fund portfolio dating back to 1983. Oregon’s portfolio has performed the best, generating a 1.8 investment multiple (calculated as described above) and a median net IRR of 15.3 percent; Washington comes in second place with a 1.7 investment multiple and a median net IRR of 13.3 percent; and CalPERS brings up the rear with a 1.6 investment multiple and a median net IRR of 13.0 percent. Naturally, many caveats apply, including the fact that the later vintages have yet to fully mature. Want copies of my spreadsheets? Shoot me an email at