UK PE Shows Strong Long-Term Performance

Headline numbers from the latest survey of UK venture fund performance showed continuing significant outperformance of UK pension fund assets over one, three, five and ten years. Over three and five years venture funds also outperformed the FTSE All-Share and FTSE 100 indices, according to the 1997 Performance Measurement Survey undertaken by the British Venture Capital Association (BVCA) in conjunction with performance measurement specialists WM Company and Crossroads Management (UK).

The 14.6% pooled IRR for venture funds over ten years compares with an increase of 13.3% in pension fund assets and a 15.7% increase in the FTSE All-Share index.

By the end of 1997, funds raised between 1980 and 1993 have returned 142% of paid-in capital, while 33% of their original investment remains unrealised. In 1997 alone, these funds returned over GBP1 billion (ecu 1.49 billion), or 29%, of their paid-in capital to investors.

Large buyout funds again emerged as the best long-term performers showing a 19.7% per annum return since inception to end December 1997. However, their one-year returns dropped to 20.6% in 1997 from 56% in 1996; The 1996 performance of larger buyout funds was considerably beefed up by rapid exits from the rolling stock operating company privatisations.

Measured over one year, development-stage funds substantially outperformed larger buyouts in 1997, turning in a surprising 30.7% IRR.

Early-stage funds, consistently the poorest performers since the BVCA began surveying performance in 1994, are now showing considerable uplift, particularly when measured over three and five years. Development and generalist funds also showed improved returns, outperforming each relevant asset class in UK pension fund portfolios and the FTSE All-Share and FTSE 100 indices over three and five years.

That UK private equity’s 1997 performance failed to match or exceed the stock market last year was disappointing, but a booming public market, combined with poor investor appetites for IPOs makes for a frustrating combination.

The significant outperformance of pension funds by private equity, however, provides the BVCA with further ammunition for its crusade to boost the domestic pension fund industry’s involvement in unquoted equities. Clive Sherling of Apax, chairman of the BVCA investor relations committee, commented: “Venture capital funds’ one- to ten-year returns outperformed the UK pension funds universe. These excellent results were achieved together with acceptable levels of liquidity. These figures indicate that pension funds with a balanced exposure to UK venture capital funds will have enhanced their overall returns”.

The full survey results will be published during June. A more detailed analysis will appear in the next issue of EVCJ.

Table 1: UK Private Equity Percentage Return by Investment Stage

Funds by specialisation

No. of 1997 3 years 5 years 10 years

funds (%) (%) (%) (%)

Early-Stage 17 14.5 22.9 21.3 8.2

Development 38 30.6 24.4 25.4 9.2

Mid-Size MBO 32 19.1 25.2 25.7 15.7

Large MBO 33 20.8 33.9 35.7 19.7

Generalist 32 20.6 25.6 20.9 10.2

Total 152 21.0 29.6 29.3 14.6

Source: WM Company

Table 2: Performance of Principal Comparators

1997 3 years 5 years 10 years

(%) (%) (%) (%)

UK pension funds (total assets)*

16.8 15.5 13.7 13.3

FTSE All-Share 23.6 21.3 16.6 15.7

FTSE 100 28.7 23.7 17.2 16.7

FTSE SmallCap 9.1 13.4 14.8 12.4

FTSE Fledgling 6.1 11.4 N/A N/A

*From WM All Funds performance of over 1,600 pension funds with a value of GBP449

billion at 31/12/97, representing approximately three-quarters of the UK pension fund industry

Source: WM Company