CHART: The highest-performing PE strategy of 2020

Venture capital was the highest performing asset class within private equity funds last year as the pandemic drove activity and investor appetite in disruptive technology companies.

Venture funds delivered an annual trailing return of 53.9 percent in 2020, according to the Q4 2020 Global Private Capital Review from The Burgiss Group. That compares with buyout funds, which posted a 21.9 percent return last year.

Over a three- and five-year period as of end-December 2020, the performance of venture funds has also been strongest among PE strategies at 30.5 percent and 20.0 percent, respectively.

“Within private equity funds asset class, we saw venture capital return 28.5 percent in Q4, which is the highest return we’ve seen in the venture capital space since the dotcom era,” Keith Crouch, a director of product development at Burgiss told Private Equity International.

Including the negative first quarter of last year, the one-year IRR of VC funds was more than 50 percent, which “made sense in a semi-virtual world where technology-oriented companies are leading the way”, Crouch added.

“This year could easily be another good year for venture capital funds, but that remains to be seen as many of these valuations are driven by companies which are now public,” Crouch said.

Looking at performance over a quarterly or one- or three-year period is important as LPs usually “tend to benchmark their programmes over relatively short time horizons since that is more directly comparable to how they benchmark themselves in the public realm”, Crouch added.

Speaking to PEI, a managing director at a US based investment consultant noted that venture’s outperformance over public markets over a sustained period is an important consideration in portfolio construction.

“My approach to portfolios is that if you’re going to lock up capital for 10-plus years, I want strong returns,” the MD said.

“Private investments start as a growth driver, so I’m trying to generate significantly better returns that I can get in public markets. And if I have that liquidity bucket to fill, I just want to do more in venture and growth equity.”

Burgiss’s dataset tracked nearly 11,000 private capital funds with a post 1978-vintage and represents more than $8.1 trillion in committed capital, according to its website.

Overall, private capital funds, which also include real assets and private debt funds, returned 14 percent in the fourth quarter and nearly 21 percent for the full year on a 12-month trailing return basis – a rebound from the first quarter of 2020 in which all asset classes had negative returns.

January to March 2020 was the covid-19 quarter, Crouch noted, in which global equity markets corrected heavily and resulted in write-downs of many private capital valuations to reflect the ongoing uncertainty.

Asia was less negative than other regions in the first quarter; US and Europe, both comparatively worse; yet no geography was spared.

Asia-focused buyout, venture and expansion capital funds delivered the best performance across markets in 2020, as economies in the region started to reactivate faster than the West.