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Latest eFront data shows recovering private equity market, but emerging market returns fall short of investor expectations

New research from Pevara, a division of alternative investments software provider eFront, has shed light on the industry’s recent performance. Further analysis also reveals underperformance of emerging market returns, relative to developed markets and the average expectations of LPs.

The findings relate to data from Pevara’s quarterly Private Equity Navigator report – produced in conjunction with INSEAD. The report is based on an analysis of all capital called and distributed by more than 2,300 private equity funds, as well as data on flows sourced directly from LPs. Central findings from the most recently available data (up to March 2014), include:

  • Private equity returns improved in 2013 in comparison to 2012 and 2011, with the returns recorded in Q4 of 2013 being the best in three years
  • Both the sum of capital calls and distributions by PE funds were lower in Q1 2014 than the preceding bumper Q4 2013, broadly reverting to the pattern seen in the first three quarters of 2013
  • Of Pevara’s two model portfolios[i], the returns from portfolio 1 continue to outstrip both portfolio 2 and average returns of the entire market. This is mainly thanks to portfolio 1’s heavy bias towards North American buyout funds. Information about the composition of the model funds can be found in the endnotes.

Emerging market underperformance

Analysis based on the most recently available data relating to emerging market investments also show that over a nine year period (2000-2011) returns fell short of LP expectations for both developed and emerging market investments, but significantly moreso for the latter. The research is illuminating given the historical lack of data relating to emerging market performance.

LPs expect an average return of 12 per cent from investments in developed markets[ii]. However in these markets, the only way to consistently meet this threshold is to have invested in funds within the top 5 per cent performance-wise:

Top-quartile funds meet or exceed this expectation in only four out of the nine years considered, and pooled returns in only one. Median returns never exceeded 9 per cent.

However the gap between emerging market performance and investor expectations is far wider. 57 per cent of LPs expect an average return of 16 per cent from emerging market investments[iii]. Yet funds in this top five per cent performance-wise only exceed this threshold in six out of nine years:

Top-quartile funds met these expectations in only two of the nine years. Pooled returns never met the 16 per cent target, and exceeded the 12 per cent threshold expected for mature markets only once.

The pattern remains when the data only focuses on venture and growth capital investments (given that emerging market investments are more likely to be in this area).

Tarek Chouman, COO for Asia and the Middle East at eFront, commented: “Our clients tell us that these reports are becoming a key tool in helping them draw sound conclusions in support of their investment plans, as the data is unique in the market.  Any private equity decisions are difficult at the best of times as reliable data is often hard to find. The collaboration between one of the world's leading academic institutions and the industry leader in investments and risk management analysis has resulted in a tool which provides greater transparency in the reporting of private equity industry data and performance.”