Significant overexposure in tech assets in East Asia and Northern Europe drove outperformance last year, data from eFront shows.
Research from the investment software provider, which for the first time used deal-level benchmarks in geographical performance analysis, revealed that the top-performing regions globally for private equity funds in 2020 were East Asia and Northern Europe, with annual returns of 31.6 percent and 26.8 percent respectively.
The North American market generated 21.8 percent returns for investors, while Western Europe had an average return of 18.5 percent and Oceania 19.5 percent.
Looking at individual countries, Japanese and Chinese deals recorded the best performance over the year, with returns of 38.3 percent and 34.4 percent respectively.
Sweden and Finland, meanwhile, had the next highest returns with 32.2 percent and 28.9 percent respectively.
“Outperformance has to do with an overrepresentation of tech – software in particular – companies in the baskets of deals for all four of these countries,” a spokesman for eFront told Private Equity International. The Chinese market also has a significant overexposure in the healthcare industry, he said.
eFront’s Fourth Annual Global Private Equity Performance Series noted that the Northern European market has a far greater exposure to technology companies than the global average, which explains the relative overperformance. Asia-Pacific stands at a similar performance level with a higher associated risk.
These markets outpaced the US, which recorded 21.7 percent – in line with the global average of 21.8 percent. The spokesman noted that the maturity of the US market means it has a different industry composition relative to less mature markets: “It has an overexposure in the energy sector that underperformed significantly in the last year. But it also offers a strong exposure to the tech industry that was the top performer over the last decade.”
The UK generated a 15 percent annual return gross of fees, the same as the Indian market, but its level of risk (69 percent) is significantly higher than the risk of investing in the Indian market (49 percent), according to the analysis. The French and Australian markets, meanwhile, have similar risk-return profiles, generating annual returns of just above 20 percent.
Investment-to-date performance also showed similar results – Northern Europe (1.81x) and Eastern Asia (2.00x) had the most favourable risk-return profiles for asset owners, measured as weighted average money on invested capital (MOIC), gross of fees and based on both active and realised deals. The global average MOIC stands at 1.68x, the data showed.
The spokesman noted that aggregating individual deals headquartered in a given country into a national market is “a superior approach”. He said fund-level analysis leaves a large number of PE-backed deals out of the picture if these deals are held by globally diversified portfolios.
Close to 12,000 leveraged buyout and venture capital deals of at least $50,000 were included in the analysis.