Returns, risks and liquidity of LBO Funds in Q2 2019
The first half of 2019 sees active LBO funds maintaining a high level of performance. Selection risk has decreased significantly, …
Most hurdle rates featured in private equity funds are set at 8% of internal rate of return. Although the origin of this specific figure is unclear, it is still largely applied to this day. It is of crucial importance for the fund manager: if this rate of return is not reached, then fund investors collect the full profits of the fund.
As the hurdle rate is time sensitive, this puts venture fund managers at a disadvantage, especially since venture-backed companies tend to stay private longer. More than 60% of LBO funds managed to beat the hurdle, while only 38% of VC funds exceeded the 8% threshold. This confirms that shorter holding periods characteristic for buyout strategy go in favour of LBO fund managers.