Report reveals an improvement in private equity performance

This is a significant improvement over the 11% reported for the three years to September 2010, the first time the report was released, and the 11.9% it achieved for the three years to June 2011. Returns are calculated on the basis of a pooled internal rate of return (IRR) since inception, the most widely used IRR measure of private equity performance. All returns are calculated net of all fees and expenses.

"Private equity is showing returns that are justifying the lack of liquidity that investors need to tolerate with this asset class," says Rory Ord, head of RisCura Fundamentals, which provides independent valuation, risk and performance analysis services.

Importance of three year returns

"Because of the long term nature of private equity investing we regard the ten year return as the headline measure of private equity returns. However, the three year returns are also significant," says Ord. "Three year returns are important because they indicate the direction of the private equity market, and are the best indication of how private equity has responded to recent market conditions."

The pooled IRR performance for the ten years to June 2012 is 17%, in comparison to the 22% achieved for the ten years to September 2010 and the 20.10% achieved for the ten years to June 2011. "This is partly due to the financial crisis, as well as the fact that some of the very strong returns from the early 2000s which we saw in the initial Report, have dropped out of the 10 year period," says Ord.

For the five years to June 2012 the performance is 12.9%. "The lower returns over the five year period, in comparison to the three and ten year periods, reflect the downturn in South African growth brought on by the global financial crisis," Ord says. "This has also affected the ten year returns, but to a lesser extent than the shorter periods."

Performance and vintage year

Historically, private equity has outperformed listed equity. The current report shows that private equity has outperformed the ALSI Total Return Index (ALSI TRI) over the ten, five and three year periods, and the FTSE/JSE Shareholder Weighted Total Return Index (SWIX TRI) over the ten and five year periods. The report compares IRR returns to the cumulative annual growth rate (CAGR) of listed indices on a direct basis, and on the more comparable public market equivalent (PME) basis.

An important indicator of performance in private equity is vintage year, the year when a fund first begins to invest its capital. Funds starting in or after 2005 have been negatively impacted by the downturn in the economy, particularly funds making investments in the period from 2007-2008.

"Part of the reason for the current results of the most recent vintage grouping is that these funds are still in the early stages of their development cycle where management fees play a significant role in determining fund returns and the investments made by these funds still need to be enhanced by the private equity fund manager."