The private equity industry has been in a tremendous expansionary cycle in recent years, following the technology sector led slowdown between the years 2000 and 2003. For instance, for the year 2005 alone, industry estimates put the total amount of private equity funds raised at over USD230 billion (a 75% jump over the 2004 figure) and the total size of private equity investments at USD135 billion (up 20% on the previous year’s number). This trend has been sustained well into 2006 and beyond, owing to strong corporate earnings data, a dominant M&A theme and an increasing interest in emerging markets. This is reflected in Figure 1 below, which compares new entrants into, as well as the overall growth of the industry (by number of funds), by vintage year1 during the last decade. As is evident, there was a marked downturn in fund-raising activity in the years immediately succeeding 2000, although the industry has grown nearly six-fold over the ten-year period.
Figure 1: Growth of the Global Private Equity Space over the Years Source: Eurekahedge
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In an effort to serve as a comprehensive source of information and trends in this burgeoning section of the alternative investment landscape, Eurekahedge has launched its inaugural Global Private Equity Funds Directory, ie a directory of professionally-managed equity investments in the unlisted securities of private and public companies. The Directory includes information on close to 2,900 funds managing a total of USD1.14 trillion in assets. This write-up aims to give a brief overview of some of the information contained therein.
A regional breakdown of private equity funds (both as investment destinations and as manager locations) shows North America as a key centre for private equity activity, with half of the funds managed out of the United States and the other half investing in North America (Figures 2 and 3). This, however, belies the growth of Europe and Asia Pacific in recent years as regions of private equity investment. For instance, between the years 2000 and 2005, North America’s share of the total private equity investment pie is estimated to have gone down from 70% to 40%, while Europe’s (from 15% to 40%) and Asia Pacific’s (from 5% to 10%) have increased.
The latter trend is also indicated by the presence of India, Hong Kong and Australia among countries where the highest number of private equity fund managers are located (refer to Figure 3 below).
Figure 2: Funds by Geographic Mandate
Source : Eurekahedge
Figure 3: Funds by Manager Location
*Based out of 37 different countries.
The growth in private equity investments over the past few years was, in the main, driven by a rise in buyouts (by value as well as number of funds) as market confidence and trading conditions improved. Their share of investments has risen from about 20% in 2000 to the current 55%. In contrast, the share of venture capital or early-stage investing has gone down from one-third to only slightly over a tenth during the same period. Figure 4 below depicts a breakdown of the current market shares of these private equity investment categories by value invested2.
Figure 4: Assets by Investment Category
*Others include Distressed (1%), Recapitalisation (1%), Special Situations (1%), Turnaround (1%), Acquisition (0.4%), Real Estate (0.01%).
Figure 5, on the other hand, compares the growth trends (percentage year-on-year increase in number of funds) seen in each of the investment strategies over the last few years, reiterating the aforementioned point about the high growth rates in the buyout, distressed and turnaround categories.
A comparison of performance3, however, tells a slightly different story, with the best internal rates of return (IRR) coming from distressed and special situations funds (27% and 17.5% respectively). This may again be explained by the high activity levels in new issuance and M&A, as well as improving corporate profitability. Among hedge funds too, and for similar reasons, special situations managers generated the best returns for 2006 (the Eurekahedge Event-Driven Hedge Fund Index was up 16.7% for the year).
Looking at the same sample of 722 funds from the standpoint of industry-wide performance, Figure 6 charts a distribution curve of the net IRR of each of these funds. The curve exhibits a strong positive skewness, that is to say, the majority of the funds have a net IRR of 10% or above. As many as a sixth of the funds surveyed have generated an IRR between 30% and 50% since inception.
Figure 6: Frequency Distribution Curve of PE Fund Performance
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Our outlook for fund performance as well as industry growth during the year ahead remains positive, as the dominant theme in the underlying financial markets now is one of a global boom in M&A (the year 2006 marked a total of USD3.6 trillion in acquisitions), and large and/or cash-rich private equity funds are making inroads into heretofore unexplored markets, emerging or otherwise (Japan, for instance). To illustrate the ‘cash-rich’ nature of these fund allocations, there are over 150 private equity funds that have assets in excess of USD1 billion each.
1 The year that a private equity fund stops accepting new investors and begins to make investments on behalf of the current investors.
2 Based on numbers in the Eurekahedge private equity databases, and not estimates of the actual universe.
3 The average of the net internal rates of return (IRR) since inception, of a sample of 722 funds in the Eurekahedge Global Private Equity Directory.