European funds drag on returns

Private equity funds on a global average basis have now reported four consecutive quarters of positive performance, but the figures have been impacted by negative IRRs in Europe, according to the latest State Street data.

The State Street Private Equity Index – which measures performance of nearly 2,000 private equity funds around the world – posted a 2.22 percent positive return in the first quarter of 2010.  The figure represents a drop of 372 basis points from the fourth quarter of 2009, but an increase of 868 basis points compared to the returns recorded in the first quarter of 2009.

The average rate of return on private equity funds worldwide suffered as a result of poor European-based fund performance, which posted a loss of 1.9 percent for the first quarter of 2010. Funds outside of Europe and the US had average IRRs of 4 percent for the quarter. US-based funds additionally contributed to the positive average, posting a mean return of 3.08 percent.

In an interview with PEO, State Street Global Services Vice President, Gerry Labonte, explained Europe-based funds were additionally affected by the dollar’s appreciation against the Euro, meaning Europe-based fund returns converted to dollars received less nominal value relative to prior years.

The positive global figures mark the fourth consecutive quarter the industry has posted positive returns, following a tumultuous period beginning in the first quarter of 2008 which began five consecutive quarters of negative returns.

However, the 2.22 percent average IRR figure represents a decrease from the 5.94 percent return on investment received in the fourth quarter of 2009. Fund returns have not dipped below 5 percent since March of last year, according to State Street.

In terms of strategy types over a one-investment period, credit-focused funds outperformed others between the fourth quarter of 2009 and the first quarter of 2010, with mezzanine and distressed debt funds recording an average IRR of 38.2 percent. All private equity funds combined recorded a 22.7 percent one-year return in the same period.

Since-inception IRRs for private equity funds as of 31 March 2010 were 11.5 percent for the quarter, up slightly from the prior quarter. More specifically, buyout funds averaged an 11.9 percent IRR, while distressed debt and mezzanine posted an 11.5 percent IRR and venture capital recorded an 8.6 percent IRR.
State Street’s index is based on the latest quarterly statistics from its Private Edge Group and includes 1,779 private equity firms with a total fund size of $1.6 trillion.