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Alternative Market Briefing

Private equity returns fall from decade high

Friday, October 19, 2018

Bailey McCann, Opalesque New York:

New research from eFront shows that LBO performance has fallen for three straight quarters from its 10-year high in 2017.

According to eFront's latest Quarterly Private Equity Performance report after reaching a peak of 1.49x in Q3 2017, the average return multiple achieved by active LBO funds has continued its retreat, back to the level of Q2 2017, at 1.45x. In addition to diminishing returns, Q1 2018 recorded a sharp decrease of the average time-to-liquidity, to just 2.63 years.

Shortened time-to-liquidity could be explained by dividend recaps as credit remains affordable, as well as an increase in the number of exits, which are often recorded at the end of a calendar year, the report shows. It could also be related to a significant number of assets added to portfolios recently (lowering the average duration of assets in portfolio), notably of add-ons to portfolio companies. Time-to-liquidity could soon reach the point where the exposure of fund investors to underlying assets could be seen as suboptimal, below 2.5 years.

Looking at returns over recent vintage years, data shows that 2009 and 2014 are so far delivering strong performance, while 2010 and 2013 are more subdued. Lower performance in 2010 and 2013 is bringing down overall yearly returns.

The report notes that for vintage year 2016, returns were previously slightly below average, and are now above it. If confirmed by following vintage years as they mature......................

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