As the private equity industry has matured, it has become clear to fund managers and investors alike that traditional measures for comparing private equity investments with listed equities are perfectible.
Long-term investors need to know how their investments are performing, in both absolute and relative terms. They need to be able to make comparisons that work across asset classes in order to construct balanced strategies. This presents a challenging array of issues to arrive at measurements that are accurate, consistent, and transparent.
At the same time, it is also obvious that performance has become a highly charged and high-profile topic. Selective measurements can present European private equity returns relative to public markets out of context. In doing so, they lack transparency and accuracy because they do not compare like with like.
Invest Europe actively supports the drive to more consistent and robust metrics that can enable investors to compare assets more easily. Our research on measuring private equity performance adds real understanding to the body of work on benchmarking private equity assets against public markets.
When Invest Europe launched the Performance Benchmark report two years ago, the aim was to demonstrate European private equity and venture capital’s true contribution to the portfolios of long-term investors, and how the industry’s returns support better retirements and savings for European citizens. As with Private Equity at Work report – which highlights the industry’s contribution to employment and job creation across Europe – the idea was to set the record straight and provide a transparent picture of private equity and venture capital’s financial performance across the short, medium, and very long-time horizons that really matter to pension funds and other institutional investors.
The Benchmark Report 2021 very clearly shows that European Buy-Outs – the largest and most mature of the European private equity segments – far outperformed listed equities to the end of 2021, generating an IRR of 15.59%, more than 900 basis points ahead of the MSCI Europe index which returned 6.41%. Mid-Market Buy-Outs, the very engine room of European private equity, delivered the best returns of the segment with an IRR of 17.13%.
Other segments of private equity also create strong outperformance. Growth Capital funds returned 16.03% to the end of 2021, while Venture Capital returned 13.04%. However, it is also notable that Venture Capital performance continues to accelerate with newer funds generating ever better IRRs – 35.51% over five years and 24.77% over ten years – outstripping North American peers over the same horizons and illustrating how far the industry has come in identifying and growing innovative European start-ups that are becoming world leaders in tech and biotech.
Invest Europe’s research delves deep into private equity performance. Our 2021 sample, provided by Cambridge Associates, includes 718 European Buy-Out, Growth, and Venture Capital funds, an increase of 47 from the 2020 sample. The report also compares European funds with international peers. On many measures, European private equity performs at least on a par with North American funds, and well ahead of funds from the rest of the world.
The findings of the Benchmark Report 2021 paint an even more powerful picture when viewed alongside our other research, including Investing in Europe: Private Equity Activity 2021. Strong returns are helping drive record European fundraising, with funds flowing in turn into companies where they sustain employment and create new jobs at a faster rate than the European average.