Pandemic-hit buyout returns dial back to long-term average – report

Buyout funds recorded an average multiple of 1.36x on invested capital in the first half of the year, reverting to the 10-year historical average and down from the near-record 1.45x in late 2019.

Returns on leveraged buyout investments are falling as the impact of the coronavirus pandemic takes a toll on performance, a study has found.

During the past two quarters the total value to paid-in for active leveraged buyout funds slumped from a near-record of 1.45x in late 2019 to 1.36x in the first quarter of this year, according to data provider eFront.

This continued in the second quarter, decreasing slightly to 1.35x, as the impact of covid-19 on portfolio companies’ value and activity started to materialise, eFront noted. The latest quarterly figures show performance has returned to the average level recorded over the past decade.

For the past five years, quarterly TVPIs have ranged between 1.37x and 1.49x, hitting a high in Q3 2017, according to eFront’s data.

Commenting on the report’s findings, Merrick McKay, head of European private equity at Aberdeen Standard Investments, noted the performance of the firm’s European buyouts portfolio over the first half of this year was mixed. Only “very few” of the firm’s PE mandates in Europe showed improved performance over H1, yet no mandates showed significant decline over the period, he said.

“Almost all our mandates, which are highly diversified across managers, geographies and sectors, showed Q1 valuation declines in the range of 5 percent to 15 percent, the level very much depending on vintage year, investment company size and sector exposures,” said McKay. For Q2, where there was a significant bounce back in the listed markets, the firm saw large and substantive reversals of the Q1 valuation declines, he added.

Similarly, Adams Street Partners has seen a “less severe impact” on the financial performance of its PE portfolio due to covid-19, said Mattias de Beau, a partner in the firm’s primary investments team. Valuations are largely returning to Q4 2019 levels and this could be attributed to sector differences as the firm’s portfolio is tilted towards technology and healthcare, which have held up well thus far, according to de Beau.

Buyout funds held on to companies slightly longer in Q2 (2.7 years versus 2.6 years in Q1), as managers adopted a “wait-and-see” approach and turned their focus to managing existing portfolio companies through the crisis, according to the report.

Following market turmoil in the first half of 2020, vintage years 2013, 2015 and 2016 are now performing significantly below the average, while recent vintage years – 2017 and 2018 – are tracking the average.

As well as reduced overall exit activity in the near term despite an uptick in M&A and continued distributions from managers, particularly in the tech and healthcare sectors, McKay expects the industry to have greater variability in short-term PE valuations and returns, as managers start to reflect greater clarity of the actual longer-term impact of the pandemic on their portfolio companies.

To drive returns in a more challenging environment, PE firms need to ensure that portfolio companies have the necessary liquidity and adequate capital structures to manage through into more uncertain times, said de Beau.

Marija Djordjevic, vice-president and research manager at eFront, noted there are still many unknowns around further covid-19 shutdowns including the impact of the US elections and general geopolitical factors that could add further volatility to returns.

Other factors including the shift in industry profitability caused by changing lifestyle habits and the billions of dry powder held today by LBO funds will affect PE performance in the years to come, she added.