Preqin: IT-Focused Funds Deliver Strong Performance, Industrial Sector Lags

Buyout funds return strong over the long term.

In its September private equity and venture capital spotlight, Preqin reported a strong long-term performance for the buyout market, which currently holds $1.49 trillion in assets under management—57% of global private equity industry assets.

Preqin determines that one of the reasons institutional investors commit vast amounts of capital to buyout funds is because of their strong long-term returns, which have been performing consistently well since 2005. According to the report, median net internal rates of return (IRRs) for vintage funds have ranged from 9.8% in 2005 to 17% in 2012, a 7.2% spread.

However, return ranges in growth funds and venture capital over the same period have been much higher, at 10.7% and 16.4%, respectively.

Over the five-year period ending December 2016, the average annualized returns for buyouts reached 16%. Across all vintage years, buyout funds taking a diversified approach across multiple sectors have median returns of 13.7%. Their net IRR performance has a standard deviation of 19.8%.

In sector-specific funds, Preqin also notes that information technology (IT)-focused funds have the highest median IRRs at 15.1%, while the lowest median returns are in energy and utilities-focused funds, at 4.5%.

Depending on the industry focus, the returns for the funds will differ. Preqin found 36% of IT-focused funds have net IRRs inserting them in the top quartile—the largest proportion of any sector. By contrast, 28% of industrial-focused funds delivered returns in the bottom quartile, while 55% of business service-focused funds have IRRs below the median for all buyouts.

“Buyout funds are the stalwart of the private equity industry, and account for more than $1.5 trillion in assets under management as of the end of 2016. Part of their enduring appeal to investors has been the ability of buyouts to deliver strong, diversified long-term returns, even in challenging circumstances. Even across the period of the Global Financial Crisis, median returns from buyout funds barely dropped below 10% on an annualized basis,” Preqin’s Christopher Elvin, head of private equity products, said in a statement. “However, while buyout fund performance has been consistent overall, there is more variance among those vehicles focusing on specific sectors. Investors should certainly be aware that while sector-specific funds can deliver some of the highest returns of any buyout fund, the potential for reward comes with increased risk.”

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