Private equity outperformes public markets

Strong performance figures from private equity investors demonstrate the potential of long term institutional investment in the asset class.

The British Venture Capital Association has published figures on private equity performance which show that private equity funds consistently outperformed public equity market benchmarks over the short, medium and long term.

Drawn by PricewaterhouseCoopers, the financial services firm, from 244 private equity funds surveyed, the figures show that the industry achieved net returns of 25.6 per cent in 2000, considerably better than some of the leading indexes in the public market.

Last year the FTSE 100 came in at –8.2 per cent, the FTSE All-Share saw a negative return of –5.9 per cent, the FTSE reached 4 per cent and the FTSE Small Cap returned 5.5 per cent to investors.

The more significant finding of the survey is that private equity also outperformed the benchmarks over three, five, and 10 years, generating returns of 28.9 per cent, 26.4 per cent and 20.4 per cent respectively.

The results make a strong case for the attractiveness of private equity to institutional investors. “This asset class has demonstrated that it can outperform, not only in the short term, but over the long run as well,” said Michael Queen, finance director at 3i and head of the BVCA’s investor relations committee.

“The results are very important in the context of a lot of the things that have come out of the Myners Report. They show pension funds that investing in venture capital and private equity as an asset class is a very sensible commercial decision.“

Queen added that for pension funds to be able to fully exploit the opportunities in private equity, it was important for the UK government proceeded with the removal of artificial barriers to investment in the asset class such as the Minimum Funding Requirement.

Stressing that investment in private equity should by no means be “compulsory”, Queen also endorsed Paul Myners’ proposal that trustees ought to be strongly encouraged to consider all asset classes and justify their investments in them.

Predictably, results in 2000 benefited from strong performance of the 47 surveyed early stage funds, which generated a 78.9 per cent return, well above the segment’s three year (48.8 per cent), five years (41.3 per cent) and 10 years (14.2 per cent).

On the other end of the spectrum, funds injecting development capital into mature businesses had a rather more difficult time in 2000, with a return of –0.5 per cent, against 15.6 per cent since 1997, 21.4 per cent since 1995 and 14.2 per cent since 1990.