How private equity lost its lustre
Private equity isn’t what it used to be.
The industry might be swelling to new heights, with literally trillions of pounds flowing into private equity houses, but returns in recent years have not reached the heights that investors might be used to.
Private equity returns between 2018 to 2023 have been about a third lower than that of historical norms, new analysis from Wall Street giant Jefferies has found.
Using a comparison of private equity ‘vintages’, or the year when capital was first deployed in the fund, Jefferies analysts discovered that “distributions from recent vintages are significantly lagging historical averages”.
The analysts found this trend across all alternative asset managers, in sectors like real estate, infrastructure, and private credit, but it was “most acute” in private equity.
“This is likely the result of a higher-for-longer interest rate cycle that has weighed on value creation and kept bid-ask spreads wide, and in turn constrained monetisation activity,” the Jefferies analysts wrote.
With the IPO market floundering to a halt, it has been harder and harder for private equity houses to boost returns on their investment.
Dealmaking has also slowed, as funds increasingly sit on greater amounts of ‘dry powder’, or cash that hasn’t been deployed into investments.
Alternative assets, private credit
Across all alternative assets, private credit, which has seen disproportionate client demand over the last few years, has been most insulated from the drop-off, with payouts falling to around 85 per cent of historic norms.
The weaknesses in alternative assets have been noticeably mixed across recent years, as while funds that began deploying capital before the pandemic started off strong, they have struggled to match that performance since 2022 onwards.
In contrast, funds that began deploying capital in the last two years “are off to a weak start” across private equity, real estate, and infrastructure, Jefferies analysts found.
However, private credit performance is still doing better than most since the pandemic, with recent vintages “continuing to track above historic norms at this relatively early-stage”.
When analysing recent returns from private equity houses, Jefferies identified EQT as the strongest performer throughout Europe over the last ten years, followed by Apax and Intermediate Capital Group.
The analysts did stress that the historic average unrealised carrying values did indicate a potential “for distributions to normalise higher when the exit environment improves”.
“The potential improving realisation/capital market backdrop could still have a sizeable impact on the return profiles of various vintages,” they added.
It’s not just returns that are down. Across Europe, venture capital funding has fallen since the highs of 2021, from 32.3m euros in 2022, to 21.7m in 2023, to only 9.4m in the first half of 2024.
Deal activity is also severely depressed, falling by almost half in 2023 from 105m euros to just 60, and to only 28m in the first six months of this year.
The news comes after a recent paper that found private equity houses have been adjusting fund performance figures to smooth returns and increase their appeal to investors.
The paper, which was published in April, discovered that by shifting when returns were reported, funds were often avoiding having to report a loss.
The effect was especially large when a fund was raising money, but once a fund was closed for investment, the effect vanished.