European Investment Benchmarks Report Shows 18.6% IRR

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Headline numbers from the first Investment Benchmarks Report: International Private Equity were announced at Venture Forum Europe ’97. The study, which was carried out jointly by Venture Economics and Bannock Consulting, with the full co-operation of the EVCA, shows an overall annual net IRR to investors of 18.6% on mature venture funds formed since 1980. Top quartile performance for this category was 29.1%.

The Investment Bench-marks Report follows a first pan-European private equity performance study conducted in 1996 by the EVCA and Graham Bannock & Partners. This time, the results are based on data on 280 funds with ecu 20 billion of committed capital (Table 1), a sample which is estimated to represent over 75% of independent fixed-life funds in the European private equity market, as well as some ecu 4 billion of investment by captive and evergreen vehicles. Participation levels have improved greatly since 1996, when the performance study was based on data from only 109 funds with ecu 5.6 billion under management, making the Investment Benchmarks Report the most comprehensive study of European private equity funds ever conducted. Of the 280 funds in the Benchmarks database, 187 mature funds contributed to the current performance benchmarks. For the purposes of the study, mature funds were defined as buyout funds older than two years and venture funds older than four years.

While the vast discrepancy between the samples used for the EVCA performance study last year and the Investment Benchmarks Report make detailed comparisons of limited value, the substantial uplift in the upper quartile IRRs for funds since inception across the whole stage focus spectrum (Table 2) is striking. The earlier EVCA study posted the upper quartile IRR for early stage funds at 12.9%, for development funds at 15.7%, for MBO funds at 33.8% and for generalist funds at 13.1%.

The Investment Benchmarks Report confirms that the 19.8% per annum returns on European private equity since 1980 have significantly outperformed the 14.2% per annum returns in European public equity markets over the same period.

Ten-year returns (Table 3) for each stage category of fund are marginally higher than the pooled IRRs since inception. Interestingly, measured across a ten-year time horizon, generalist private equity funds deliver higher returns (21.2%) than any other fund category, even buyouts. The outstanding one-year figures are driven by recent record levels of distributions to investors by European funds. The Investment Benchmarks Report indicates that in 1993, cash and stock distributions totalled ecu 3.2 billion, compared with ecu 2.5 billion in the preceding year.

Investors in European private equity are now seeing tangible realised proceeds by an asset class whose performance, until the middle 1990s, was characterised largely by unrealised valuation uplifts. The immediate challenge for the private equity industry is therefore to balance the massive investor interest in recent short-term performance with reasonable investor expectations in the longer term.

The full Investment Benchmarks Report: International Private Equity will be published in January, at which time the EVCJ will examine the report’s findings in more detail. 





Table1: 1997 Investment Benchmarks Database 


Fund Composition by Country Investment Focus


Country Focus              No. of Funds        Committed Capital


                                               (ecuM)


United Kingdom             154                 10,781.0


Multi-Country               66                   7148.0


France                      25                   1385.3


Spain                        9                    254.1


Germany                      4                    220.2


Italy                        4                    189.9


Netherlands                  6                    164.3


Other                       12                    478.0


Total                      280                 20,620.8


Source: 1997 Investment Benchmarks: International Private Equity








Table 2: Mature European Private Equity FundsO Net IRRs to Investors:


 Returns from Inception to 31 December 1996


Stage Focus         Sample Size  Average IRR Pooled   Pooled


                         Size               IRR    IRR for Top Quarter


Early Stage               28      4.6%     5.7%    27.2% 


Development Venture       60      7.6%     7.3%    18.7%


Buyouts                   53     17.0%    17.6%    41.9%


Generalist Private Equity 46      3.5%    19.4%    22.9%


All Private Equity       187      9.4%    18.6%    29.1%


Source: 1997 Investment Benchmarks: International Private Equity








Table 3: Mature European Private Equity Funds’ Net IRRs to Investors:


Returns from Inception to 31 December 1996


Stage Focus                 One     Three        Five        Ten


                            Year    Year         Year        Year


Early Stage                 47.7%   16.4%        12.5%       6.5%


Development Venture         19.3%   15.8%         9.5%       7.9%


Buyouts                     32.7%   20.1%        16.5%      18.0%


Generalist Private Equity   24.2%   11.1%        13.6%      21.2%


All Private Equity          27.0%   13.6%        13.8%      18.5%


Source: 1997 Investment Benchmarks: International Private Equity