A critical tool in the arsenal of limited and general partners, benchmarking a given fund’s performance against the playing field provides useful insight throughout the fund’s lifecycle. Particularly in the current climate, where many expect fund returns to only tighten going forward, staying apprised of industry standards is crucial.
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Covering over a decade's worth of comprehensive fund returns, PitchBook's PE & VC Fund Performance Report offers insight into the current investment and fundraising landscape. Moreover, this latest edition has been revamped considerably to include benchmarking against Morningstar indices. Sponsored by Donnelley Financial Solutions, the report analyzes net cash flows for both private equity and venture capital asset classes, as well as fund performance metrics such as DPI and TVPI multiples. With detailed analysis of how funds from different vintages have performed over the past few years, the report includes the latest, complete datasets available in order to provide a holistic background to current dealmaking trends.
Report Highlights Include:
- KS-PME horizon benchmarks by vintage for both VC & PE funds
- Brand-new case study of J-curves for PE funds by vintage
- Global PE cash flows
- Multiple metrics on fund performance, from IRR quartiles to horizon IRRs by fund size
When using a KS-PME, a value greater than 1.0 implies outperformance of the public index (net of all fees). For example, the current 1.03 value for 2005 vintage PE funds means investors in a typical vehicle from that year would be 3% better off having invested in PE than if they had invested in public equities over the same period.
When using a KS-PME, a value less than 1.0 implies underperformance of the public index (net of all fees). For example, the 0.74 value for 2006 vintage VC funds means investors in a typical vehicle from that year would see only 74% of the value comparably achieved in the public markets.
Case Study: PE J-curve
In this case study, we examine PE fund J-curves by vintage over time. Although they are well known, it is still useful to detail the concept of J-curves in brief. Owing to the tendency of alternative investment funds to draw down capital early in their life to make investments before subsequently delivering positive cash flows later in their lifecycles, the IRR of these vehicles typically traces a curve somewhat reminiscent of the letter J. While the pace of early investments and the ability to realize quick exits are the key determinants of the shape of the J-curve, it can be impacted by other factors including the funds’ fees as well as managerial tolerance of risk.
When looking at J-curves across different vintages, an evolution in the cashflow profile is evident in more recent vintages. Examining the disparity at year one, massive initial drawdowns as funds commence their investment phases is to be expected. The fact that PE funds of the 2008 and 2009 vintages observed the most severe drawdowns makes intuitive sense given the more prolific buying of troubled or discounted businesses in the wake of the financial crisis, when these funds were in the midst of their investment period. Most other vintages see their IRRs fall to roughly -20% to -25% in that first year, including both even elder vintages-2006 and 2007-as well as those more recent.
Curiously, 2013 and 2014 vintages stand out for the relative mildness of their drawdowns in that first year, particularly as the pace of PE investment continued to accelerate as these funds were raised and began deploying capital. While it is possible that these funds are simply taking longer to deploy capital, another explanation is that PE managers are becoming more strategic in how they call capital down and deliver it back to LPs.
One such tactic is the usage of subscription line loans, which general partners can use to initially fund deals and avoid making capital calls until later. Delaying the timing of capital calls from LPs improves the cashflow profile of the fund, effectively boosting the IRR. Dividend recaps and other strategies to quickly return capital to LPs without fully exiting a company have also become more prevalent in recent years, with easy access to affordable debt making these transactions more viable than they had been in the wake of the financial crisis.
IRR by Fund Type
In our recent reports, IRRs over a 10-year horizon have been relatively consistent across private assets; however, in more recent reporting periods, VC and debt funds have dropped below other strategies as their 10-year horizon IRRs decreased to 7.56% and 7.79%, respectively. The latest 10-year horizon calculation dropped the 4Q reporting period, which was a strong quarter for VC returns and contributed significantly to a higher overall horizon. Now that the calculation has rolled forward, we have seen horizon IRRs drop accordingly.
Despite record-level distributions from sub-$250 million VC funds, larger VC funds have pulled down overall horizon IRRs. In 2016, these large funds distributed their lowest amount of capital since 2012, as there has been a recent dearth of exits for large portfolio companies. Another contributing factor is that over the last year some VCs have marked down some of their current holdings, perhaps recalibrating from the high valuations that have been associated with recent financing rounds.
Conversely, analyzing median IRRs by vintage, as opposed to horizon IRRs, we see that more recent VC funds are outperforming the rest. It is worth noting that even though the median IRRs on more recent vintages look attractive, most of these funds are still in their early stages and DPI values remain low. To achieve such returns VC funds must turn those paper gains into realized returns.
Skilled manager selection exists
Funds-of-funds often receive a high level of scrutiny because they add an extra layer of fees on top of the primary funds in which they invest. Despite this higher gross cost to LPs, funds-of-funds have delivered 9.37% net of fees over a 10-year horizon, outperforming all other private asset classes over the same period. This provides credence that these fund selectors have some degree of expertise in manager selection.
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