Private equity is getting beaten up on the campaign trail, but when it comes to delivering returns, the asset class continues to be a solid contender. Both private equity and venture capital generated double-digit returns for 2011,“placing their performances well ahead of their public equity counterparts, in what was a stormy year for the markets and the broader economy,” according to research house Cambridge Associates LLC.
“For 2011, the performance of U.S. private equity came in at around 10.9 percent net,” says Cambridge managing director Andrea Auerbach. “The level of distributions that private equity managers gave back to limited partners (LPs) was almost $94 billion—the largest number we’ve ever seen in the 25 years we’ve been tracking this information.” The record distributions “likely reflect the long-awaited completion of realization events delayed largely due to the recession and buoyed by active M&A and IPO environments in 2011,” surmises Auerbach.
The superior performance of PE and venture capital funds compared with public equities continues across multiple timeframes, finds both Cambridge and another organization that tracks PE returns.
The Private Equity Growth Capital Council, an advocacy and research group, also released findings showing that private equity outperformed the Standard & Poor (S&P) 500 index for one, five and 10-year time horizons by 7.1, 5.7 and 7.6 percentage points, respectively. (Note: Returns are calculated net of fees.)
“The consistent private equity outperformance of public markets is essential for pension funds, university endowments and charitable foundations to achieve their investment goals,” says council CEO Steve Judge. “Private equity helps provide retirement security to millions, makes college a reality for more students and funds charitable causes,” Judge argues.
One exception came in the three-year time horizon. The S&P 500 beat private equity during that period, which the council attributes to the “historic dip during the financial crisis, which inflated S&P returns during this period.”
The data provides good news to those who are trying to defend private equity from accusations that the asset class eliminates jobs. Beyond public relations, private equity investors are well motivated to deliver returns to their LPs as they try to raise new funds, points out Auerbach.
“A lot of managers have to demonstrate that they can deliver those returns before they go back to their LPs to raise additional funds, so I think we’ll continue to see a lot of effort to deliver money back to LPs,” says Auerbach.
For more on the topic, visit themiddlemarket.com/video to view our conversation with Auerbach.