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Western European PE Shops Produce Best Returns

Data from eFront, covering 4,000 funds globally, shows that Western European private equity funds showed the best returns globally, at the same time as delivering robust performance on the VC side.

Global Private Equity Performance Series report highlights:

  • Western European private equity funds achieved an overall return of 1.68x (TVPI - total value to paid in), ahead of the US on 1.56x.
  • On an IRR (internal rate of return) basis, the figures were 14.32% for Western Europe and 12.17% for the US.
  • The performance was led by Nordic funds on 1.91x, Benelux funds on 1.85x, and the UK on 1.62x.
  • On the VC side, Western Europe delivered 1.34x, led by the UK on 1.37x and Italy on 1.35x.
  • On a combined basis, Western Europe was the second best performing region for PE and VC globally, recording 1.65x – just behind China on 1.67x. 
  • Other regions, including Russia / CEE, Southern Europe and Latin America, saw markedly lower returns.

eFront’s Global Private Equity Performance Series research, which analyses to all-time returns achieved by around 4,000 funds globally from 1991 to present, supports the thesis that those countries and regions that have experienced higher productivity growth offer the best private equity returns. This explains the divergence in performance between the UK, Nordic and Benelux countries on one side and Southern European countries on the other. 

Another source of difference in performance between the UK, Nordic and Benelux countries with respect to Southern Europe, and France to a lesser extent, is the asymmetric exposure to the sovereign debt crisis during the period 2013 to 2015, when the exit market was at a an historic peak in terms of activity. This resulted in lower company valuations, and therefore returns, in countries with more severe public debt issues.

Tarek Chouman, CEO of eFront, commented: 

“When analysing private equity and venture capital, forming a sophisticated understanding of the characteristics of specific geographic markets is of crucial importance. Our Global Private Equity Performance Series represents, to the best of our knowledge, the most comprehensive publicly available analysis of returns, risk and liquidity among private equity’s main geographies. Private markets do not offer precise or timely information, and the nature of closed-ended funds introduces other complexities. These challenges are opportunities for those willing to invest the time in truly understanding the idiosyncrasies and stages of evolution in different geographic markets.”

Summary by region:

UK: UK LBO funds provide an attractive risk-return profile, above trend. More recent funds of vintages 2008-12 sit at 1.7x (realised at 71%). Holding periods used to be 5.4 years (2003-2007) but have decreased to 3.5 years (2008-2012), however, many funds are still holding assets - therefore, current the IRR is expected to decrease. Although the UK is the most developed LBO market in Europe, it still delivers solid returns to investors able to select funds wisely.

France: French LBOs offer an attractive risk-return profile (10.24% and 1.51x), although more conservative than Western Europe in general (14.32% and 1.68x), and notably the UK (15.76% and 1.62x), and the US (12.17% and 1.56x). There is a clear relationship between maturity and performance and French funds have still to unlock some of their return potential.

Germany / DACH: German LBO funds have, on paper, the worst risk-adjusted performance with an IRR of 5.87% and TVPI of 1.27x. However, funds mature slowly in the DACH region. Vintage years 2003 to 2007 (realised at 89%) generated a 1.42x TVPI and a 7.6% IRR. 2008-12 vintage years are only 32% realised, the lowest level of the sample.

Benelux: The Benelux LBO market is at higher end of the risk-return spectrum. Both the pooled average IRR and the money multiple (1.85x) are top performers. Realised funds confirm this performance at 1.95x for vintage years 2008-2012, with four-fifths of assets realised. However, the modified IRR of Benelux LBO funds stands at 5.48% - the highest of the sample – indicating that Benelux funds may appeal to investors able to bear significant selection risk.

Nordics: Nordic LBO markets are at the higher end of the risk-return spectrum. Nordic LBO funds rank high in terms of multiples (1.91x) and risk. Vintage years 2008 to 2012, however, generated a 1.58x return - at par with Southern Europe and below Western Europe. Conditions might now have become more favourable again to LBO investments in Nordic countries, which reached 2.02x with vintage years 2003 to 2007.

Italy: Conservative returns (1.19x) equate to low levels of risk. Italian LBO funds have been through a steep learning curve. Vintage years 2003-2007 were the only ones in the sample to lose money. This experience helped to reshape local LBO investing as funds of vintage years 2008-2012 record a TVPI of 1.54x and an IRR of 14.4%, realised at 71%. 

Spain: Although Spanish funds are below the trend line in terms of risk-adjusted returns, they provide investors with a 1.40x TVPI. This is in line with their historical performance of 2003-2007. More recently (2008-2012), Spanish funds reached a 1.61x (and 11.1% IRR), realised at 61%. Assuming that active funds follow this path, the current aggregated performance figures might significantly understate the potential returns.

CEE / Russia: The region’s LBO market displays significant selection risk and lower performance (6.63% and 1.34x). Local LBO funds are still at a very early stage of their development: vintage years 2008 to 2012 have only realised 34% of assets. Vintage years 2003 to 2007 reached a pooled average performance at 1.46x, currently realised at 63%. TVPI may therefore increase going forward, if not IRR.

US: US LBO funds deliver more conservative return (1.56x) than Western Europe (1.68x). This might be related to the higher level of competition in the US, which are the most developed LBO market. Over time, the US delivered a consistent performance: 1.52x for vintage years 2003-2007 and 1.54x for 2008-2012. Fully realised funds used to generate a 1.78x and a 15.07% IRR, but the US market is now much more developed and it is unlikely that performance will reach such levels going forward.

China: At first glance, Chinese LBO funds offer an attractive IRR with an exceptionally low selection risk. In fact, the lower risk may be related to its lower maturity: only 53% of the returns have been realised so far for funds of vintage years 2008 to 2012 (collectively reporting a 1.73x). Thus, the high money multiple of the full sample (1.61x) is still largely in the making.

For more information, please download the full Global Private Equity Performance Series report here.