Preqin: $1.49T Buyout Market Remains Resilient

Sep 14 2017 | 10:38pm ET

The buyout market currently accounts for more than half of the $2.6 trillion global private equity industry, according to research from data provider Preqin, while average returns for buyout funds exceeded 10% in every vintage year since 2006.

Moreover, the spread of returns has been significantly smaller than in the growth or venture capital sectors, Preqin said in a statement Thursday. Institutional investors have committed huge amounts of capital to these funds, in part because of strong long-term returns.

However, these returns have varied widely among buyout funds focused on different sectors. For instance, while more than a third of IT-focused funds delivered net IRRs in the top quartile of all buyout funds, more than a quarter of those focused on industrials are in the bottom 25%. 

Preqin’s research was published in the company’s September Private Equity & Venture Capital Spotlight. Other highlights:

  • Buyout funds currently hold $1.49 trillion 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, significantly lower than the range 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 (4.5%). 

  • Returns differ considerably between funds focused on different industries: 36% of IT-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 funds are the stalwart of the private equity industry,” commented 
Christopher Elvin, head of private equity products for Preqin. “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,” he added. “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.” 

Founded in 2003, Preqin is a leading source of information for the alternative assets industry, providing data and analysis via online databases, publications and bespoke data requests. The company's Hedge Fund Online service is a leading source of intelligence on the hedge fund industry, with performance information for over 16,000 hedge funds across strategies and geographies. More than 47,000 professionals in 90 nations use the company’s products. 

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