Recherche et études

This issue of FrontLine makes a comparison of return profiles and cash flow schedules of different types of LBO funds (small, medium, large and mega cap funds). The results of the analysis are in line with the well-established analogous findings from the public markets. Small caps perform better on average, but the large caps are better predictable and bear less risk for the investor.

To contribute to the ongoing debate about private markets “illiquidity premium”, this paper proposes a new approach to liquidity as a dimension of private equity investing, along with risk and return. Along those lines, the liquidity risk associated with private equity lies in the variation of holding periods over time. To assess this risk, an equivalent to holding periods can be approached by calculating an average time-to-liquidity, which is a function of multiples and IRRs.

Thanks to the high quality of the data provided by eFront Insight, it is possible to evaluate the average time-exposure of investors and estimate the variations around this average.

In 2018, the performance and risk of LBO funds have stabilized at levels fairly close to the records set in 2017. The time-to-liquidity is particularly short, back to levels last seen in 2011. 2018 was a golden year, with high-performance levels, a particularly low level of performance dispersion and a short time-to-liquidity.

Capital commitments have continued strongly since the Brexit vote in mid-2016, with deployment becoming more stable from 2016 onwards, compared with the trend seen over the previous three years. A “wait and see” approach has then led to a significant decrease in RVPIs over the last three years.

The actual Brexit will lead to further disruptions. Will this trigger a wave of new investments? Once the outcome of the negotiations is known, it seems likely that British fund managers will capitalize on this expected major economic disruption.

In this survey, which to the best of our knowledge, is the largest of its kind ever undertaken, we attempted to distil the core functions of an LP into 10 distinct competency areas. We then provided three possible responses of ascending proficiency.
The report canvases the opinions of 179 limited partners ranging from high net worth individuals to major pension plans and finds that LPs exhibit the highest proficiency levels in areas of private equity allocation and return metrics. At the same time, the competency areas that still have the most room for improvement in performance are negotiation, reporting and position monitoring.

To see the relationship between LPs proficiency levels across various competency areas and the type of LP institutions, their geographical location and size of PE assets under management, take a look at our findings in the report.

A detailed analysis of venture capital funds globally shows that Chinese funds of vintage years 1997-2018 have delivered returns of 1.79x (total value to paid-in), comparing favourably with US funds on 1.70x and and Western European vehicles on 1.75x.
In addition, the research shows that Chinese funds take longer to reach maturity and have demonstrated longer hold periods for investments. In terms of time to liquidity, Chinese funds average close to 5.5 years, while US and Western European funds have a time to liquidity of under 5 years. The same is true for the global average.

This paper investigates whether the introduction of “fair value” rule affected the volatility of valuations in the private markets. We have analysed the impact of two major crises on private equity portfolios: 2001-2003, prior to the implementation of the rule, and 2007-2009, which happened simultaneously to the introduction of the fair value method.

“Despite a drop in performance from the record high achieved in 2017, returns from venture capital funds globally have remained strong (above 1.4x of TVPI) over recent quarters. This, combined with a sharp reduction in the level of risk that returned it to pre-2013 level, presents investors with a real opportunity to generate attractive risk-adjusted returns from the asset class. Western Europe in particular looks very strong, and could see convergence with US performance should it be able to maintain the returns of recent vintages.

Companies now are held on average 2.87 years – below the long-term average of 3.27 years and a duration not seen since 2011. Two reasons could explain this evolution: the sharp decrease can be triggered by exits, but also an increase in recent investment activity.”