Don’t look to private equity for positive valuations

BVWireIssue #102-5
March 20, 2011

Here’s a startling analysis of the investment returns and cost of capital for the “best and the brightest” owners of private companies–private equity fund managers and their wealthy individual and institutional investors: you’ve lost a ton of money since 2002 and you may be running out of cash.  A negative cashflow of over $250 billion, to be precise.  Perhaps a CD at a local bank would have been a better strategy?  What does this mean for an industry that, as Rob Slee and John Paglia report in their Pepperdine Private Capital Markets Survey, routinely predicts returns of over 20%?

Though the news so far in 2011 seems closer to breakeven, PitchBook, the leading provider of information on private capital markets and deals, offers this analysis in their latest news release:

In the past few years, limited partners have put more money into PE funds managed by U.S. investors than they have seen come back. From 2002 through the first half of 2010, those funds received a total of $1.07 trillion in contributions but distributed only $773 billion to their limited partners. For a three-year stretch from 2004 to 2006, the amount of distributions exceeded contributions, but in the following years, contributions dramatically outpaced distributions by $81 billion in 2007, $174 billion in 2008 and $78 billion in 2009. With contributions constantly exceeding distributions, limited partners have less money with which to make new fund commitments. However, the first half of 2010 showed positive signs. Even though the total amount of contributions still exceeded distributions, it was only by $7 billion. If 2011 continues on a similar track as 2010, we could find limited partners with more money in their pockets and more PE investors having better fundraising luck.

Please let us know if you have any comments about this article or enhancements you would like to see.