UK private equity funds outperform public markets

UK private equity funds have delivered much stronger returns to investors than the public markets in both the short and longer term, according to new research. Pan-European buyout funds have been the main driver of this outperformance.

The long-term returns of UK private equity funds have been more than double those of the stock markets, according to a new study by the British Private Equity and Venture Capital Association.

The UK trade body’s annual Performance Measurement research, which is based on a survey of its members, showed that UK unlisted private equity funds delivered an internal rate of return of 18.7 percent over a ten year period, compared with a 7.9 percent return from the FTSE All-Share index.

On shorter term metrics, their out-performance of the stock market was equally marked – 20.9 percent compared to 8.5 percent over five years, and 31.3 percent compared to 17.2 percent over three years.

The out-performance was largely driven by the strong returns from large buyout funds. While the 237 funds raised since 1996 delivered a three-year IRR (after costs and fees) of 31.3 percent, the 31 large buyout funds contained within this number returned 37.1 percent.

Pan-European funds performed slightly better than those targeting deals in the UK, delivering a 34.1 percent IRR over three years compared to 22.7 percent for UK-specific funds.

Looking at the performance of funds over their entire life-cycle, the research revealed that pre-1996 vintage funds have yielded an IRR of 15.5 percent since inception, while funds raised since then have delivered a 16.4 percent IRR.

The returns from private equity funds were also well in excess of the average growth of UK pension fund assets, according to figures from the WM Company. These increased by 13.9 percent over three years, 8.5 percent over five years, and 7.9 percent over ten years – suggesting that pension funds need to be increasing their allocation to private equity to boost returns.

BVCA chief executive Peter Linthwaite said the figures show why the asset class is so attractive to pension fund trustees. “The above-average returns that private equity generates helps retirement schemes provide good pensions for their members,” he said.