Stable Returns, Through Good Times And Bad

When it comes to charting U.S. buyout market fund-raising, think Mount Everest. Back in the 1990s, spike-booted U.S. buyout firms raised more and more money every year, almost without exception.

By 1998, they raised $55.5 billion, nearly ten times as much as they had raised six years before, in 1992. The year 2000 saw a near-term peak, with more than $60 billion raised, before tumbling back to the low double-digit billions in the early part of this decade. Most of us remember the top concerns of limited partners during the steep climb. Too much money chasing too few good deals. Too many second-rate teams driving up prices for the disciplined. The venture capital fundraising market went through a similar rise and fall, though too few sounded alarms at the summit.

Needless to say, venture returns tumbled in the early 2000s, along with the pace of fundraising. Too much money had sloshed around for the available supply of viable start-ups to effectively absorb it all. But buyout firms continued to churn out steady, admirable returns, paving the way for the current boom. An analysis of the performance of the U.S. buyout fund portfolios of the California Public Employees’ Retirement System, Oregon Public Employees’ Retirement Fund, and the Washington State Investment Board shows a remarkable consistency for vintage years 1994 to 2002, even as fundraising climbed then plummeted.