Research Papers

This edition of Frontline uses eFront Insight data to see whether the deployment of some simple automated triggers, based on carefully constructed fail-safe thresholds, could help investors better understand their risks and exposures ahead of time, allowing them to be more proactive in responding to threats and exploiting opportunity.

Active venture capital funds made a very impressive closure of 2018, far exceeding historical averages. These high last-quarter returns remain associated with comparatively low risk and shorter time-to-liquidity, as VC funds capitalize on a favorable exit environment.

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.

Our research indicates that private equity funds struggle to deploy capital at the same pace as they raise it, as distributions have outweighed capital calls by a significant and striking degree over the past five years.

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.