Benchmarking private equity: Evaluating the performance of buyout and venture capital funds relative to public equity markets

Abstract

As private equity has assumed a pivotal role in investors’ portfolios, allocators need to carefully assess the return and risk of the asset class. The illiquid nature and lack of good quality data poses challenges for modelling private equity.

This thesis studies the performance of over 1,800 U.S. and European focused buyout and venture capital funds, that are of vintage years 1990 to 2015, using high-quality, fund-level, cash flow data from Preqin. The thesis focuses on relative performance against public equity markets.

For buyout funds, I find even higher excess returns than previous research. Buyout overperformance compared to S&P 500 averages 30%, 21 % and 18 % for vintages 1990 to 1999, 2000 to 2009 and 2010 to 2015 respectively over a fund’s life. I find average annualized excess return of 4.1 % for buyout funds over the whole sample. Some recent literature suggests that buyout has lost its edge over public equities in terms of relative returns in recent years. The findings of this study suggest that this is not the case.

For Venture capital funds, I find significant outperformance against the S&P 500 from 1990 to 1999 and 2010 to 2015 but underperformance in 2000s. Venture capital overperformance averages 44%, -5 % and 44 % for vintages 1990 to 1999, 2000 to 2009 and 2010 to 2015 respectively over a fund’s life and the annualized excess return averages -.6 % for the whole sample.

The conclusions are mostly robust and qualitatively similar when assuming different levels of systematic risk. Additionally, benchmarking against different public market indices shows that the findings are also generally robust to the choice of benchmark.