Preqin provides a round-up of this year’s 10 hottest topics in the private equity industry
1. The Turning Point for Venture Capital?
The asset class has been much maligned for sub-par performance since the dot-com crash, but returns for more recent venture capital funds have picked up significantly: one-year horizon IRRs to March 2014 (27.0%) outperform all other private equity strategies. Preqin’s data demonstrates that this improvement is not just reserved for top performing funds: as shown in Fig. 1, bottom quartile venture capital funds also saw a marked improvement, recently moving into the black for the first time.
2. Record Private Equity Distributions
2013 saw the highest annual distributions from private equity investments on record. In 2013, a total of $388bn was called and $568bn distributed, compared to $492bn and $381bn in 2012 respectively. Although this is not the first time that distributions have increased significantly or exceeded called-up capital, what is notable is the extent to which distributions have surpassed amounts called. As of December 2013, total annual distributions surpassed capital calls by 46%; only in 2004, 2005 and 2011 have distributions exceeded called capital, and in each of these years it was by only 3%, 5% and 7% respectively. Continued growth in the private equity asset class and the recovery of the financial markets cultivated more favourable market conditions, allowing fund managers to exit the investments they were forced to sit on when the financial crisis hit.
3. Resurgent Europe
The sovereign debt crisis in 2009 threatened the collapse of economies in the south of the continent, most notably Portugal, Italy and Spain. Ireland and Greece also suffered significantly, and general confidence across Europe as a whole tumbled. A slowdown in economic growth in the region, high unemployment rates and political upheaval in certain countries had a massive impact on private equity investors’ confidence in the region. April’s edition of Private Equity Spotlight detailed the recent positive shift in the private equity landscape, with the ramping-up of private equity activity and interest focused on the continent evidenced by Preqin’s statistics on fundraising, deals and investor appetite. Fundraising had been increasing year-on-year in Europe since 2010, contributing to the record levels of dry powder focused on the region (Fig. 3). All these factors have contributed to a renewed confidence in Europe as an attractive destination for private equity investment.
4. Correlation Between Fundraising Success of Certain Fund Types and Their Risk-Return Profiles
Preqin investigated which fund types produced the best risk-return profile for investors, specifically aiming to test the relationship between performance and fundraising success. The study showed there is indeed a correlation between the fundraising success of certain fund types and their risk-return profiles. Best exemplified by secondaries funds and funds of funds, which occupy opposite ends of the spectrum, the level of fundraising success achieved by vehicles (here measured by time taken to reach final close and ability to reach fundraising target) is linked to the risk-return profiles of the fund types (Fig. 4).
5. Rise in Public Pension Funds Investing in Private Equity
Following the news of high profile US-based state pension scheme CalPERS exiting the hedge fund space, October’s Private Equity Spotlight examined the average allocations of US-based public pension funds to the private equity asset class. Fig. 5 shows the number of active US-based public pension funds in private equity rising year-on-year, from 266 in 2010 to 299 in October 2014. The figures for the average percentage of US-based pension funds’ assets under management show a similarly positive story, at least for the period between 2011 and 2013, when there was a surge of 100 basis points. As of October 2014, the average US-based public pension fund’s allocation to private equity was 7.0% of assets under management, which is only a slight dip from the previous year’s figure of 7.2%. It appears that this investor type still has a healthy appetite for private equity investments, and has been ramping up its activity in recent years. Private equity looks set to remain an important component of US-based public pension funds’ portfolios for years to come, offering investors good portfolio diversification and out-sized returns over the long term.