2018 was a “golden year for private equity, with high-performance levels, a particularly low level of performance dispersion and a short time-to-liquidity”, according to eFront’s Quarterly Private Equity Performance report.
In fact, leveraged buyout funds reached the highest total-value-to-paid-in multiple in 2017 and 2018 (1.47x and 1.45x, respectively) in a decade. This year, however, could mark a turning point given the late-cycle phase of the industry, Tarek Chouman, chief executive of eFront, said in a statement.
Looking at quarterly returns in 2018, fourth quarter TVPI showed the third-strongest performance in a decade at 1.46x and delivered a net excess performance of 0.037x when compared with the five-year average of 1.42x and 0.13x. 2018 also fared better than ten-year average of 1.33x, data show.
In addition, 2018 also saw the time-to-liquidity ratio for private equity funds come down to 2.7 years, six months shorter than the average 3.1 years over the last decade. The report noted that “dividend recapitalisations might play a role in this significant reduction in time-to-liquidity, enabling fund managers to distribute early while retaining full control of the assets”.
While debt remains cheap – supporting more dividend recaps – markets are volatile and company valuations might not increase as fast as they have done previously, Chouman said in a statement. Regulators are also limiting leverage to six times EBITDA, further inhibiting recaps, he added.
Looking at vintage years globally, 2011 and 2014-vintage US LBO funds are strong performers. For example, the $2 billion Francisco Partners III delivered 21.1 percent and 2.4x investment multiple, and the $8.9 billion Hellman & Friedman Capital Partners VII generated 25.1 percent net IRR and 2.5x multiple, according to the latest fund performance data from California Public Employees’ Retirement System.
Meanwhile in Europe, 2012-vintage funds show “very strong performance, edging closer toward 2.0x”, according to eFront. The €5.3 billion Fifth Cinven Fund, for example, delivered 22.7 percent net IRR and 1.7x multiple, according to Washington State Investment Board documents as of end-June 2018.
And just like their US peers, 2014 funds are solid performers, getting even further away from the average line and crossing the 1.5x multiple, the report noted.
Performance is also tied to cyclicality in terms of entry multiples, said Gabrielle Joseph, head of due diligence and client development at Rede Partners.
“If you have a fund where the investment period was characterised by modest entry multiples and then have a hot and attractive exit market when the company matures, you are able to create a high internal rate of return. When you have fairly modest holding periods, good entry pricing and appropriate exit pricing, then the stars are aligned for some outstanding performers.”