Post-crisis returns are as strong as the 1990s – report

Private equity returns are better than previous research suggests, according to research from two US academics.

US buyouts have historically outperformed the S&P 500 by a fairly wide margin, according to a white paper titled Have Private Equity Returns Really Declined? from Greg Brown of the Kenan Institute of Private Enterprise and Steve Kaplan of the University of Chicago.

Funds with vintages between 1986 and 2014 generated 4.8 percent of direct alpha – or excess return against the public market – and an average public market equivalent of 1.22x against the S&P 500 as of Q3 2018.

The report partially contradicts AQR research from January which concluded “private equity does not seem to offer as attractive a net-of-fee return edge over public market counterparts as it did 15-20 years ago from either a historical or forward-looking perspective”.

Kaplan and Brown’s paper uses Burgiss data taken directly from institutional limited partners, which they claim is relatively free of selection bias.

Excess returns for 2009 to 2014-vintage US buyouts were roughly similar – albeit slightly lower – to vintages of the mid-to-late 1990s, the white paper noted. The highest excess returns were for 2000-04 vintages, while 2006-08 funds had generated the lowest as of the third quarter of last year.

US buyouts have outperformed the public markets even when accounting for a size and value premium in public markets by using different benchmarks. Excess returns have been consistently higher against the Russell 200 index than against the S&P 500 since 2008.

Buyout performance was also superior when estimating the effects of an assumed beta of 1.2 – where 1.0 equates to the same volatility as the stock market – using the S&P 500, Russell 2000 and Russell 3000 Value from 1986-2014. Outperformance was greatest against the Russell 2000 Value Index for the 2009 -2014 vintage years and lower during the 1990s.

The report did concur with AQR’s conclusion that high multiples are a cause for concern with regards to future returns, pointing to a negative correlation between a fund’s PME and the average EBITDA multiples paid.

Although EBITDA multiples averaged 10.9x in 2017 and 2018, potentially putting those vintages on course to underperform the S&P 500, they have sat above 10x since 2014 and these vintages continue to outperform.

The report also concurred with AQR’s conclusion that high levels of capital raised is a concern given the historical correlation between public market equivalents and buyout fundraising, though it argued that the correlation is not as strong as history would suggest.