Long-term Private Equity Down in Q3

January 14, 2003 (PLANSPONSOR.com) - Long-term returns in private-equity funds have begun to show some weakness in recent months, in what could be another gloomy sign of things to come for the private-equity industry.

Data through the third quarter show the three-year return for private-equity funds fell to 1.0%.   This is a precipitous decrease from the 5.4% return shown in the previous quarter’s report, having some analysts saying the recent slump in long-term returns may make it tough for private-equity funds, which typically have a long investment horizon, to meet the expectations of their investors, according to a Dow Jones report.

Overall, data released by Thomson Venture Economics and the National Venture Capital Association (NVCA) reveals the 20-year performance for the entire private-equity industry, which includes venture investments, buyouts, and mezzanine investments, slipped to 14.5% through the end of the third quarter.

Although still a significantly higher performance than public equities, the return “barely meets” the 15% to 20% private-equity fund investors typically expect when making such investments.

Short Term

On the bright side, short-term returns, though still recording large negative returns, showed a slight improvement compared with the second quarter of 2002. One-year private-equity returns came in at negative 12.3% through September 30, compared with negative 16.5% in the previous quarter.   However, because a majority of private-equity funds have lives that last 10 or 12 years, analyzing their short-term returns doesn’t necessarily predict their ultimate performance.

After three years of investing, venture-capital funds launched in 1996 returned 1.17 times the original investment to their investors, Thomson Venture Economics and the NVCA note. Furthermore, companies remaining in the portfolios of those venture funds had a remaining combined valuation of 4.03 times the original investment.

Comparatively, more recent funds, launched at the height of the dot-com boom, show much weaker returns.   1998 funds show a three-year return of 59 cents and a valuation of 94 cents for the companies remaining in their portfolios and 1999 funds have a combined paid amount and a residual value of a mere 67 cents on the original investment dollar.