eFront, the leading financial software and solutions provider dedicated to Alternative Investments, has published its latest annual Global Private Equity Performance Series, which shows that Western Europe consolidated its global lead in private equity, with LBO funds further improving their performance during 2019. Overall, 2019 was a positive year for global private equity performance, with most regions seeing rising returns as well as falling risk.
Key findings:
Western Europe consolidated its global lead in private equity in 2019, with LBO funds further improving their performance.
Selection risks decreased, pushing the region further above the risk-return trendline from an already favourable position, and making Western Europe the most attractive region globally for private equity on a risk-return basis.
Within Europe, Benelux, Nordic and UK LBO funds maintained their position at the top of the return spectrum, delivering IRRs of 16.64%, 16.29% and 15.6% respectively.
DACH funds, meanwhile, recorded a remarkable jump in performance, as their IRR reached 10.9%, up from 5.8% one year earlier.
Elsewhere, Chinese and Hong Kong LBO funds are positioned well above the trendline, with an IRR of 9.9%, signifying strong performance, and a notable decline in risk over the past year.
Meanwhile, the US preserved its position as the best-performing VC market globally, with an IRR of 14.3%. Italy was the leading performer in Europe, recording an IRR of 10.9%.
2019 was a great year for exits in most regions, with maturity increasing almost across the board.
Analysis
2019 was a positive year for global private equity performance, with most regions seeing rising returns as well as falling risk. In fact, every market operating below the risk-return trendline saw performance improvements during the year, with the exception of Eastern Europe and Russia.
It was also the year the Nordics overtook traditional leaders Benelux and the UK, to become the world’s top performing private equity market, helping Western Europe consolidate its global lead in private equity (see Figure 1). However, despite the positive performance overall, this was in a year in which a number of the very top performers saw modest declines in returns, including the UK, the US, Benelux and the Nordics, as well as China and Hong Kong.
Meanwhile, France improved its private equity performance above the risk-return trendline, while Spain crossed the psychological 8% threshold as its performance improved slightly.
Benelux retained its crown as king of the LBO markets in 2019, but the Nordics closed the gap with a strong year for exits (see Figure 2). Nordic funds also registered a massive drop of their extreme selection risk, falling from 67.5% to 46.3%.
French buyouts also had a strong year for distributions and performance, improving its IRR slightly to reach 12.1%, while its top quartile funds pulled away further from the bottom quartile. This trend was even more pronounced in Spain, where the top 5% of funds now outstrip the bottom 5% by 1.24x. Spain also recorded an increase in IRR of 58 basis points to reach 9.1%.
Overall, Western Europe remained stable while the US and the UK experienced respectively a decrease in IRR of 14 and 25 basis points. Despite IRR falling 52 basis points during 2019 (now at 9.91%), Chinese and HK BO funds remain attractive due to their low levels of selection risk. The extreme and the most frequent selection risks in China are 32.6% and 7.4%, compared with the global averages of 43% and 14%.
DACH funds remain well below the trendline, but active funds in the region saw a remarkable jump in performance, as their IRR reached 10.9%, up from 5.8% one year earlier, giving reason for optimism.
2019 was a great year for exits in most regions. The maturity of the French market grew from 43% to 62%, pointing at a strong level of realisations. The Nordics also recorded a dramatic increase from 50% to 68%, while Spain reached 61% from the last year’s 49%.
Venture capital
In venture capital, the US remains the stand-out leader on the back of internet-era gains, but its active funds also saw performance improvement during 2019. China and Hong Kong venture funds show similarly impressive return performance, but with the additional attraction of a much narrower range of outcomes among funds – a paper advantage that may wear off as this very young market sees more investments realised over the coming years.
Western European VC funds further strengthened their position above the trendline, closely tracked by Southern European VC, albeit at a lower return and risk level. Italian venture capital funds retained their position, in 2019, as having the best performance in Europe but also the most aggressive risk-return profile. The market produced an IRR of 10.9% combined with a high extreme selection risk of nearly 80%. Selecting the best performing funds, and avoiding the worst, matters a lot in Italy.
Given the time-weighted nature of IRRs, it is helpful to consider the speed at which different regions return capital. A sharp difference in the number of years required to generate liquidity across all geographic markets between the periods 2002-2008 and 2009-2016, persists (see Figure 4). Before the global financial crisis, the duration of an LBO investment was 5.5 years, while at present, it takes only 3.3 years for an average global LBO fund to generate liquidity. Two standard explanations emerge. First, some investments made by the second group are more recent, and thus skew the data. Also, funds of the first group are likely to have delayed their exits, waiting for a recovery after the 2008-2009 crisis.
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