Buyout funds outperform public markets by 11.5%

The latest study from LBS and HEC academics follows a report they released in June 2010, which found buyout funds to have a unique alpha component.

Investors opting to place their cash in buyout funds capture an 11.51 percent higher return compared to a public market portfolio of similar risk and strategy, according to a recent study carried out by HEC Paris and London Business School.

Researchers took a sample of 20 European buyout funds and examined what would happen if a limited partner instead put their capital in industry-specific indices which mimic the sample funds’ underlying investments. Anonymous fund data was provided by Pantheon Ventures, and limited to those with pre-2001 vintage years to avoid analysing funds with unrealised investments. 

To replicate the timing of the buyout funds' cash flows, the study “purchased” shares to represent called capital and “sold” shares to represent divestments. Researchers additionally levered up the public indexes in a manner which reflected the heightened credit risk used by the sample buyout funds.

The buyouts we analysed delivered returns with alpha and delta components of statistical significance, showing that superior returns can be achieved in this asset class

Oliver Gottschalg

Under the two investment strategies, which carry similar operational and financial risks, an investor would receive a 19.61 percent return backing the private equity horse. The public market investor would receive a more paltry 8.10 percent return.

The difference in returns of 11.51 percent, which the researchers call “performance delta”, “indicates that the buyouts we analysed delivered returns with alpha and delta components of statistical significance, showing that superior returns can be achieved in this asset class”, said Oliver Gottschalg, a prominent private equity scholar at Paris’ HEC School of Management and one of the study’s lead researchers.

This study complements an earlier LBS-HEC report, which found an alpha component responsible for nearly 5 percent of performance helps buyout funds outperform public markets. Both studies were conducted with the support of private equity lobbying group the British Venture Capital Association (BVCA).