Private equity results have been less than stellar in the past few years, but a recent Bain & Co. report suggest the sector could see a turnaround this year.
Despite last year’s modest returns and the overhang of portfolio companies, the consulting firm and other sources say, PE-industry observers are optimistic about near-term results.
One reason for this optimism? Industry data shows that private-equity firms closed—or exited–129 funds in the first quarter of 2013 for a total of $67.1 billion, compared to $79 billion in the first quarter of 2012. And some firms are reporting improvements of 10-20% this year in fund raising.
Tough 12 Months
In its Global Private Equity Report 2013 report, Bain says the overall PE internal rates of return averaged 5.5% in 2012. This was the weakest performance since the 2008 financial crisis.
Several factors influenced that short-term performance.
Portfolio valuations, which are portfolio investments that general partners have not sold, reflected movements in the public equity markets, and equity markets in 2012 were volatile, according to the recent Bain & Co. report notes.
“In the 12-month period through June 2012, stock markets were prone to jitters about possible sovereign-debt default and a potential double-dip recession. That volatility took a toll on PE valuations, affecting PE fund returns in all major geographies and all size categories,” the report explains.
“Funds that focused on the European and Asian markets experienced more volatility in their valuations and suffered the steepest declines in their short-term returns. The swings were also more pronounced for the biggest buyout funds, in part because they typically use more leverage than the smaller funds do,” Bain notes.
Another factor affecting returns has been the growing inventory of portfolio companies that PE funds hold.