Fund write-ups continue in Q3

Average private equity fund valuations increased 5.83 percent in the third quarter of 2009, giving the industry two straight quarters of write-ups following a long drought that began in 2008, according to preliminary statistics from the State Street Private Equity Index.

The numbers indicate the private equity market has stabilised, even though the prospects for a sustained recovery are still unclear.

While the third-quarter numbers were only a slight increase from the previous 5.48 percent growth in the second quarter, they represent a welcome trend following five consecutive quarters of losses that included write downs of 6.46 percent in the first quarter of 2009 and a whopping 16.32 percent in the fourth quarter of 2008. The numbers were compiled by State Street by tracking more than 1,600 private equity funds on a dollar-weighted basis.

Broken down by categories, average valuations in the buyout arena were written up 7.09 percent, while venture valuations decreased 6.55 percent in the same period. Most significantly, distressed and mezzanine investments continued their impressive rebound after taking a one-year loss of 32.6 percent as of the first quarter of 2009, with valuations written up by an average of 16 percent in the second quarter and 13.4 percent in the third quarter.

“Mezzanine and distressed debt funds [have] actually changed the whole story of private equity,” said Chris Ward, of State Street's private equity group. “They are short term investment-focused, and especially in their huge volatility are more correlated to the public stock market.”

“Especially before 2008 we saw private equity have a one- or two-quarter lag behind the public market, but now it seems like they are more on the same page,” Ward said.

The continued growth of the stock market in the fourth quarter could indicate that fund valuations will see further write-ups in the same period. However, Ward says that it is still too early to say whether the industry is heading for a “V-shaped” recovery.

Ward has previously warned of the possibility of the industry hitting another economic “bottom” before a proper recovery.

Among some of State Street’s other preliminary findings, with final numbers expected to be released next week, buyout funds had a -10.61 percent IRR for the year ending 30 September 2009, followed by venture capital with -4.77 percent. Mezzanine/distressed debt grew 6.54 percent during the same period.