Europe takes strong lead in fund performance

Private equity funds across the globe provided investors with modest returns in the third quarter of 2010, but it was Europe which brought more to the table after two prior disappointing quarters.

European funds breathed life into already improving private equity fund performance data in the third quarter of 2010. Private equity funds worldwide provided limited partners with a 6.57 percent return on their investment for the three-month period ending 30 September 2010. That marks an increase of 592 basis points from the previous quarter, and 74 basis points from the same period last year, according to the latest data from the State Street Private Equity Index.

Leading the charge were European funds, which posted a 14.66 percent return in the third quarter, up significantly from a -3.14 performance in the second quarter. It is also an improvement from the-1.9 percent return for European funds in the first quarter of 2010, when globally funds averaged a 2.22 percent positive return.

The index measures the performance of nearly 2,000 private equity funds around the world by aggregating data from thousands of LP commitments made by pension funds, endowments and foundations. The latest quarterly data marks the sixth consecutive quarter of positive returns, prior to which the asset class saw five straight quarters of dropping valuations.

Distribution multiples have recovered nicely from historical lows and are now more in line with historical averages in this asset class

Suresh Krishnamurthy

The funds tracked by the index collectively distributed $88.3 billion in proceeds over the last 12 months, a 240 percent increase over the prior year, said Suresh Krishnamurthy, senior vice president at State Street.

“As a result, distribution multiples have recovered nicely from historical lows and are now more in line with historical averages in this asset class.”

While returns in the medium-term look respectable (20 percent in the year to September 2010) the longer-term figures are less so. For the three years ending September 2010, a limited partner with a broad private equity exposure would have received a paltry 1.64 percent return, according to the index. Over 10 years, the typical lifespan of a fund, that same LP would have received an IRR of just 8.06 percent.

State Street’s index is based on the latest quarterly statistics from its Private Edge Group, which includes 1,893 private equity firms with a total fund size of $1.7 trillion.