Key findings
The top-performing regions globally for private equity in 2020 were Eastern Asia and Northern Europe, with an annual return of 31.5% and 26.8% respectively.
In terms of individual countries, Japanese and Chinese deals recorded the best performance over the year, returning 38.3% and 34.4% respectively.
Northern Europe was the strongest performer on a risk-adjusted basis, returning 27% but with a low standard deviation of annual returns (74.5%).
During 2020, Finland and Germany recorded the most favorable annual return per unit of risk measured as standard deviation.
Investment-to-date performance analysis shows that regions diverge into two groups: a low risk, low return group including Western Europe and North America, and a high risk, high return one including APAC and Northern Europe.
Japan recorded the highest investment-to-date performance, with a MOIC of 2.07x and the most favorable risk-return profile among all the national markets.
China recorded an extreme dispersion in the gross MOICs of deals, driving its standard deviation to the highest value among all countries, signifying high risk, while Sweden has the lowest variation in the average deal multiple performance.
The IRR view confirms Northern Europe and Eastern Asia as the top performers. These two regions, as well as South East Asia and Oceania, exceed 20% annualized IRR performance, gross-of-fees.
Analysis
The top-performing regions for private equity in 2020, based on the relative change in the valuation of portfolio deals over the year, were Eastern Asia and Northern Europe, with an annual return of 31.5% and 26.8% respectively. Looking at Figure 1, all regions are positioned close to the trendline with the notable exception of Northern Europe, found significantly above the trendline with a weighted average annual return of nearly 27%, signifying lower risk. The Northern European market is far more exposed to technology companies relative to the global average, which explains the relative overperformance. The Asia-Pacific region stands at a similar performance level but with a higher associated risk.
Figure 1 – The average annual returns and their standard deviations for different regional PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different composite regions. The performance is measured as a weighted average relative change in the value of the deals as reported in the investment schedule of the quarterly report for limited partners for 2020. The performance is provided on a gross of fees basis. The standard deviation of relative returns across deals is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Eastern Asia achieved the highest annual return in 2020 (31.6%), paired with the highest risk as measured by the standard deviation of individual returns (99%). The observed high variation in returns comes from the presence of high-performing outliers in China and Japan and an overrepresentation of VC deals relative to LBO in the Chinese market.
The North American market generated a 21.8% return, equaling the global average, but at a higher risk, with the standard deviation of annual returns standing at 84%, compared with the global figure of 80%. With an average return of 18.5%, meanwhile, Western Europe is positioned below the trendline, but its low standard deviation (63%) keeps it close to the global average return per unit of risk.
Adopting a more granular approach and analyzing the individual national markets offers more clarity (see Figure 2). The top performers in 2020 were China (34.4%) and Japan (38.3%). Sweden (32.2%) and Finland (28.9%) also hold the center stage, positioned above the trendline due to high returns and low levels of the standard deviation of individual returns.
Similar to the regional view, the relationship between the annual return and the standard deviation at individual national private equity markets is relatively strong. During 2020, Finland and Germany have recorded the most favorable annual return per unit of risk measured as standard deviation. German deals have low variation in returns (50%) while generating 23.3% of annual returns on average, while Chinese deals record the highest level of volatility (106%), followed by the Japanese ones (98%).
The US market is positioned below the trendline. Its performance (21.7%) is almost identical to the global average (21.8%), but American deals record a high variation in deal performance (85%). The UK generates 15% of the annual return gross of fees, the same as the Indian market, but its level of risk (69%) is significantly higher than the risk of investing in the Indian market (49%). French and Australian markets, meanwhile, have similar risk-return profiles, generating an annual return of just above 20%.
Figure 2 – The average annual returns and their standard deviations for different national PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different countries. The performance is measured as weighted average money on invested capital (MOIC), calculated as a ratio of the current valuation of a portfolio deal (as reported in the investment schedule of the quarterly report for limited partners, as of Q4 2020) and the total capital invested in the deal. The performance is provided on a gross of fees basis. The standard deviation of MOICs across the deals is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Looking at investment-to-date performance, Figure 3 confirms that Northern Europe (1.81x), Eastern Asia (2.00x), and South East Asia (1.79x) offer the most favorable risk-return profiles for asset owners, measured as weighted average money on invested capital (MOIC), gross of fees and based on both active and realized deals. The global average MOIC currently stands at 1.68x.
Eastern Asia shows the highest average return, but it also exposes investors to the highest levels of risk (the standard deviation of individual deal MOICs being 9.46x). The APAC and the Middle East markets are both positioned on the upper-right end of the graph.
Figure 3 – The average MOIC and the standard deviation of performance multiples for different regional PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different composite regions. The performance is measured as weighted average money on invested capital (MOIC), calculated as a ratio of the current valuation of a portfolio deal (as reported in the investment schedule of the quarterly report for limited partners, as of Q4 2020) and the total capital invested in the deal. The performance is provided on a gross of fees basis. The standard deviation of MOICs across individual deals is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Focusing on the interquartile dispersion (Figure 4), geographical regions appear as if separated into two sections: a group with MOICs in the range of 1.45x-1.75x and spread inferior to 1x (the low risk, low return group), and a group with MOICs of 1.75x-2x and a spread higher than 1x (high risk, high return). Western Europe (1.66x) and North America (1.67x) are the two major regions predominantly impacting the global average performance and both are found in the low-risk group. The high-risk group comprises regions such as Northern Europe (1.81x), the Middle East (1.75x) and Eastern Asia (2.00x).
Figure 4 – The average MOIC and the interquartile difference in individual deal performance multiples for different regional PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different composite regions. The performance is measured as weighted average money on invested capital (MOIC), calculated as a ratio of the current valuation of a portfolio deal (as reported in the investment schedule of the quarterly report for limited partners, as of Q4 2020) and the total capital invested in the deal. The performance is provided on a gross of fees basis. The interquartile spread measured as the difference between the MOICs of the top and bottom quartile deals is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Looking at the national figures (Figure 5), China recorded an extreme dispersion in the gross MOICs of deals, driving its standard deviation to the highest value among all countries, while its overall MOIC reached 2x. Japan is the leader in performance, scoring 2.07x, with fewer extreme cases than China, resulting in a much lower standard deviation and the most favorable risk-return profile among all the national markets.
Sweden, Germany, Netherlands, the US and France generate gross MOICs in the region between 1.65x and 1.75x. Among those countries, Sweden has the lowest variation in deal performance (1.65x) and France the highest (6.71x). On aggregate, Canadian deals are significantly below the trendline with a MOIC at 1.37x, while all other countries record MOICs between 1.5x and 1.75x.
Figure 5 – The average MOIC and the standard deviation of performance multiples for different national PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different countries. The performance is measured as weighted average money on invested capital (MOIC), calculated as a ratio of the current valuation of a portfolio deal (as reported in the investment schedule of the quarterly report for limited partners, as of Q4 2020) and the total capital invested in the deal. The performance is provided on a gross of fees basis. The standard deviation of MOICs across individual deals is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Finally, looking at annualized IRR as a measure of performance, the regions are split into two groups separated by the trendline (Figure 6). The first group consists of the regions that have an average annualized gross-of-fees IRR above the level of 20%: South East Asia (21.44%), Northern Europe (21.48%), Eastern Asia (22.30%) and Oceania (20%). The Eastern Asian deals also record the extreme standard deviation of annualized IRRs, thus pulling the whole APAC geography in the region of high variation geographies.
The second group of regions yields annual IRRs that range from 14% to 18%. North America (14.16%) fell short of matching global trends, mainly because of Canada’s 7.5% IRR. Europe follows the trendline, with an 18% IRR and narrow quartile spread, resulting in an attractive risk-return profile. Western Europe is a more mature and established market, and thus records lower dispersions of risks and return.
Figure 6 – The average deal IRR and the standard deviation in individual deal IRRs for different regional PE markets
Source: eFront Insight, As of Q4 2020. The figure shows the risk-return profiles for different composite regions. The performance is measured as weighted average annualized internal rate of return (IRR), as reported in the investment schedule of the quarterly report for limited partners, as of Q4 2020. The performance is provided on a gross of fees basis. The standard deviation of annualized IRRs is used as a measure of risk. The returns are calculated in USD. Strategies included: Leveraged Buyout and Venture Capital. The lower limit for the deal size is set at 50,000 USD.
Melissa Ferraz, Managing Director, Global Head of eFront Insight at BlackRock, commented:
“The fourth edition of Global Private Equity Performance Series is for the first time using the deal-level benchmarks in geographical performance analysis. Powered by data sourced directly from GPs and validated via the Insight platform, we can now provide a detailed analysis of performance and deal activity across all regions and sectors at the portfolio company level.”