Buyout Fund Performance Stays Strong Over The Long Term

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IT-focused funds see robust performance, while the industrial sector shows weaker returns

The buyout market currently accounts for more than half of the $2.6tn global private equity industry. Institutional investors have committed huge amounts of capital to these funds, in part because of the strong long-term returns they have seen from them. Not only have average returns for buyout funds exceeded 10% in every vintage year since 2006, but the spread of returns has been significantly smaller than in the growth or venture capital sectors. However, returns have differed greatly among buyout funds focused on different sectors. While over a third of information technology-focused funds delivered net IRRs in the top quartile of all buyout funds, more than a quarter of funds focused on the industrial sector are in the bottom quartile.

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Key Buyout Fund Performance Facts:

  • Buyout funds currently hold $1.49tn in AUM, representing 57% of global private equity industry assets.
  • Since 2005, buyout funds have performed consistently: median net IRRs have ranged from 9.8% for 2005 vintage funds to 17.0% for 2012 vintage funds, a spread of 7.2 percentage points.
  • This is significantly lower than the range of returns seen in growth funds (10.7 percentage points) and venture capital (16.4 percentage points) over the same period.
  • Over the five years to December 2016, buyout funds’ average annualized returns reached 16.0%.
  • Buyout funds which take a diversified approach across multiple sectors have median returns of 13.7% across all vintage years, and their net IRR performance has a standard deviation of 19.8%.
  • Among sector-specific funds, information technology-focused funds have the highest median IRRs (15.1%), while energy & utilities-focused funds have the lowest median returns (4.5%).
  • Returns differ considerably between funds focused on different industries: 36% of information technology-focused funds have net IRRs putting them in the top quartile, the largest proportion of any sector.
  • By contrast, 28% of funds focused on investment in the industrial sector delivered returns in the bottom quartile, while 55% of funds focused on business services have IRRs below the median for all buyouts.

Buyout Fund Performance

Buyout Fund Performance

Christopher Elvin, Head of Private Equity Products:

“Buyout funds are the stalwart of the private equity industry, and account for more than $1.5tn in assets under management as of the end of 2016. Part of their enduring appeal to investors has been the ability of buyouts to deliver strong, diversified long-term returns even in challenging circumstances. Even across the period of the Global Financial Crisis, median returns from buyout funds barely dropped below 10% on an annualized basis.

However, while buyout fund performance has been consistent overall, there is more variance among those vehicles focusing on specific sectors. As might be expected, information technology-focused funds have shown some of the highest returns, in line with the incredible expansion of that sector over the past 30 years. Performance in industrial and energy sectors is lower, however, perhaps partly due to the difficulties of pursuing commodities-related strategies. Investors should certainly be aware that while sector-specific funds can deliver some of the highest returns of any buyout fund, the potential for reward comes with increased risk.”

Buyout Fund Performance

Buyout Fund Performance

Article by Preqin

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