European PE returns highlight continued strong performance
The final returns are in for 2017 for private capital strategies. LPs are seeing strong IRRs from both distributions as well as valuations (a double-edged sword no doubt.) European private equity has shown no signs of Brexit trepidation as portfolio company exits continue to look strong. Venture Capital struggled somewhat in terms of IPOs, as companies are remaining private longer with plenty of available capital to sustain them.
LPs continue to climb the wall of worry, however. When asked what were their top concerns about the private markets, 60% of LPs said valuations and 40% stated the amount of dry powder available (those figures were up from 48% and 26% respectively from last year according to P&I.) In fact, in a recent survey, over 60% of LPs believe to U.S. buyout market is overheating. But if LPs are getting more vocal about their concerns, its certainly not showing up in the fundraising figures. Strategies across the board are seeing no trouble attracting capital. GPs are actually seeing more institutional investors committing to a first close than ever before, as LPs look to secure a slot with top-quartile managers.
Emerging markets in 2017 and the beginning of 2018 have seen a significant uptick across the board in terms of performance, fundraising, deployment and exits. Indeed, public market exits for private capital-backed emerging market companies rose to 181, from 140 in 2016. Its clear that LPs are looking to diversity their PE investments above and beyond GPs facing top-heavy valuations closer to home.
As we’ve said before, despite above average performance across just about all strategies, concerns for LPs are mounting. Fund mangers of all stripes had better be prepared to get their ‘information’ house in order as investors are going to be ramping up their monitoring efforts of their current managers, to say nothing of what due diligence is going to look like in the next few years. The cyclicality of the private markets is not lost on anyone who has spent more than a few years in the business. Investors will still need to put money to work, even if its at the top of the cycle. Issues around transparency and communication, though, will most certainty be front and center if performance becomes more muted.
|1 yr||3 yrs||5 yrs|
|U.S. Private Equity Index||17.5%||11.8%||13.9%|
|U.S. Venture Capital Index||11.1%||8.1%||15.3%|
|U.S. Real Estate Index||13.9%||10.2%||11.9%|
|Ex-US Developed Markets PE and VC Index||27.9%||13.8%||12.3%|
|Emerging Markets PE and VC Index||18.6%||10.6%||12.2%|
|MSCI World ex-US||24.2%||7.4%||7.5%|
Horizon pooled returns as of 12/31/2017; Source: Cambridge Associates