Against a backdrop of elevated dry powder figures and healthy fundraising for both private equity and venture capital, the sheer mass of distributions to limited partners that have prompted recommitments must be noted. No less than $416 billion was sent back to LPs by PE managers in 2015, while their venture counterparts tallied up $65.1 billion—both highs for the decade.

But what does the most recent data show? PitchBook’s latest Global PE & VC Benchmarking Report, sponsored by Donnelley Financial Solutions, reveals that venture net cash flows have turned negative for the first time since 2013, while PE GPs have still distributed at a robust rate. Now, the question for firms on both sides is how best to contend with the current cooling of the exit environment in order to realize value in the oldest post-crisis vintages.

Introduction

The track record for both private equity and venture capital remains impressive. Both asset classes outperform public market equivalents across most time-frames and vintages, though PE has shown better comparative returns in the long-run, whereas VC has performed best over the last few years.

Fundraising efforts have been aided by net positive cash flows to LPs—a trend that could reverse if the industry continues at its recently dampened pace of exits.

In this report, we explore various benchmarking methodologies including horizon and vintage public market comparisons, IRRs, investment multiples, and fund cash flows. We hope this report is useful in your practice. As always, feel free to contact us at [email protected] with any questions or comments.

Dylan E. Cox

Analyst

KS-PME Benchmarks

An Introduction To PME Benchmarks

IRR and cash multiples have been the gold standard of benchmarking for decades, but one of their main drawbacks is that they cannot be directly compared to indices that are used in mainstream asset classes. Public-market equivalent benchmarks (PMEs) effectively address this problem, making it possible to directly compare alternative asset fund performance to the performance of indexed asset classes by using fund-level cash flows.

As there are multiple ways to calculate a PME, PitchBook has employed the Kaplan-Schoar PME method.IRR and cash multiples have been the gold standard of benchmarking for decades, but one of their main drawbacks is that they cannot be directly compared to indices that are used in mainstream asset classes. Public-market equivalent benchmarks (PMEs) effectively address this problem, making it possible to directly compare alternative asset fund performance to the performance of indexed asset classes by using fund-level cash flows.

As there are multiple ways to calculate a PME, PitchBook has employed the Kaplan-Schoar PME method.

Kaplan-Schoar (KS) Method:

PE & VC Fund Managers

A white paper detailing the calculations and methodology behind the PME benchmarks can be found at pitchbook.com. PitchBook News & Analysis also contains several articles with PME benchmarks and analysis. These can be read here.

To find out how the PME benchmarks can be utilized to gauge performance of a specific fund or your fund portfolio, please contact us at [email protected] white paper detailing the calculations and methodology behind the PME benchmarks can be found at pitchbook.com. PitchBook News & Analysis also contains several articles with PME benchmarks and analysis. These can be read here.

To find out how the PME benchmarks can be utilized to gauge performance of a specific fund or your fund portfolio, please contact us at [email protected]

PE & VC Fund Managers

When using a KS-PME, a value greater than 1.0 indicates outperformance of the public index (net of all fees). For example, the current 1.30 value for 2005 vintage PE funds means investors in a typical vehicle from that year are 30% better off having invested in PE than if they had invested in public equities over the same period.

PE & VC Fund Managers

When using a KS-PME, a value less than 1.0 indicates underperformance of the public index (net of all fees). For example, the 0.90 value for 2006 vintage VC funds means investors in a typical vehicle from that year would see only 90% of the value they would have in the public markets.

PE & VC Fund Managers

PE & VC Fund Managers

Venture performance at the three-year horizon is now only outpaced by the longest PE horizon, at 15 years. It will be interesting to track the realization of this current high performance for VC over ensuing years.

Russell Investments is the source and owner of the Russell Index data contained or reflected in this material and all trademarks and copyrights related thereto. Russell Investments is not responsible for the formatting or configuration of this material or for any inaccuracy in PitchBook Data, Inc.’s presentation thereof. For more information on Russell Investments and Russell Indices, visit www.russell.com.

PE & VC Fund Managers

KS-PME Case Study: PE & B2B

Applying a KS-PME calculation to one sector of the PE industry is useful in determining PE’s effectiveness in a given arena. Here, we compare returns for PE funds that have made at least half of their investments in B2B portfolio companies against the Russell 3000 Index. We find that B2B-focused PE funds outperform the public market equivalent on one-, three-, five-, 10-, and 15-year horizons. This outperformance is even more pronounced than the PE industry overall—indicating that PE firms do particularly well with enterpriseoriented businesses. Furthermore, each of the 11 vintages of B2B-focused funds from 2003 to 2013 has either matched or outperformed its public market equivalent, compared to PE overall which has had one year of underperformance (that was the 2010 vintage).

PE & VC Fund Managers

PE & VC Fund Managers

PE & VC Fund Managers

In many ways, enterprise-oriented usinesses are the bread and butter of PE. This would include a diverse array of professional services firms, wholesalers, equipment manufacturers, logistics providers, shipping companies, and infrastructure investments. The extensive rolodexes that PE uses for hiring and to expand to new geographies and channels, as well as the cost-cutting approach that has made the industry famous are both particularly useful for B2B companies. Such basic approaches are widely applicable, more so than the scale-oriented strategies more useful in IT, the niche sector expertise needed for energy investments, or the finicky regulatory requirements often present in both the financial services and healthcare sectors.

IRR by Fund Type

As investors decide on their capital allocations to various alternative asset classes, it’s important to keep in mind not only future trends, but also past performance. Taking a horizon IRR for each type of fund that we track, it’s evident that the performance for PE, VC, debt and fund-of-funds are nearly equivalent across the long term. On a 10-year horizon, the IRR for all four of these asset classes clocks in between 9.0% and 10.0%. However, the risk profiles for each of these industries are quite different, and the shorter-term cash flows and return dispersions

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