US private equity slumps in Q3

US private equity returned -4.3% during Q3 2011, while distributions outpaced contributions for the fourth straight quarter.

US private equity returns fell 4.3 percent during the third quarter of 2011, the first decline following nine consecutive months of positive performance, according to research from consultant Cambridge Associates.

“The downward turn was due in part to the escalating debt crisis in Europe, which helped cause an even sharper drop in public markets during the period,” according to a statement.

The Nasdaq and S&P 500 fell 12.9 percent and 13.9 percent, respectively, for the three-month period ending 30 September, 2011.

General partners distributed $18 billion to their limited partners during the third quarter, a 22.4 percent drop compared to Q2 2011. GPs called $17.9 billion from LPs during the period, a 22.8 increase compared to the previous quarter and the fourth consecutive quarter in which private equity distributions outpaced contributions.

The decline in US private equity performance during the second half of 2011 was reflected by many of the industry’s largest managers. Mega-firms Apollo Global Management, Blackstone and KKR all reported a drop in earnings over the full year and the fourth quarter due to lower unrealised mark-to-market valuations. Apollo said on an earnings call the firm’s reporting was tied into the volatility and uncertainty of the markets in the latter half of last year as they were forced to report mark-to-market, reflecting “a moment in time”.

Examining performance quarter to quarter can be misleading for private equity firms that work to profit from long-term investments that may not be realised for five to 10 years.

“During the third and fourth quarter, sentiment was at a low, and that is reflected in the valuation process,” Apollo president Marc Spilker said on an earnings call last week. “The market today feels a bit better, but sentiment is shifting very quickly, so it’s hard to determine how performance will look by the next quarter.”

Like private equity, US venture capital also posted a decline in returns during the third quarter of 2011. Venture capital’s 0.7 percent fall also represented the first drop in nine quarters for the asset class.

The venture capital index’s 10-year return, however, was 2.6 percent during Q3 2011, rising nearly 7 percent from its low of negative 4.6 percent during the third quarter of 2010.

Cambridge was unavailable for comment at press time.