Private Equity Showing Stable Performance

by Phillip Morton, Investors Offshore.com

03 November 2006

US private equity performance showed stability in the short and long term for the three-month period ending June 30, 2006, although concerns remain for future performance in the light of the weak market for initial public offerings, according to Thomson Financial and the National Venture Capital Association (NVCA).

Both the buyout and venture capital asset classes experienced modest declines in one year returns and moderate improvements in five year returns in the second quarter when compared to the first quarter of the year, the Thomson/NVCA report explained.

Meanwhile, long term performance private equity performance remained steady and continued to outperform both the S&P 500 and NASDAQ for the ten and twenty year horizons.

Short term performance showed a slight decrease with one year venture capital returns posting a 16.2% return for Q2 2006, down from 19.2% in Q1 2006. Five year returns improved, but remained in negative territory at -3.5% up from -4.3% in Q1 2006. The report attributed this negative return on continuing fall-out from the tech bubble burst. Ten and twenty year returns remained steady at 20.8% and 16.5% respectively.

Mark Heesen, president of the NVCA said that the venture capital community is "on the road to slow recovery" since the bursting of the tech bubble.

"We are starting to see this recovery clearly in the five year performance numbers,” he observed.

"For the last four quarters the five year return number has been steadily moving towards positive territory as the companies that survived and exited have begun to balance those that have failed. With this era largely behind us, our biggest concern now is the viability of the venture-backed IPO market, as long term performance for the venture capital industry is contingent upon a stronger, more receptive environment for taking these emerging companies public," he explained.

The report went on to show that one year buyout returns saw a very slight decrease as well posting 27.3% for Q2 2006, compared to 28.3% for Q1 2006, while ten and twenty year buyout returns were relatively steady at 8.9% and 13.4% respectively.

“The returns for this asset class are coming under increasing pressure created by the record commitments over the last two years," noted Darrell Pinto, Director of Global Performance at Thomson Financial.

"With no end in sight to the supply of new capital from institutional investors looking to diversify a larger percentage of their portfolios into alternative assets, time will tell if the short-term downward pressure on returns is an indication of a saturated market, or if indeed, opportunistic GPs can find a way to create a disruptive release that will continue to deliver long term returns well in excess of public markets," he concluded.

Recommended