Private equity buyout funds globally delivered returns that beat public equity markets by a sizable margin in 2016. In the U.S., funds delivered a 6% end-to-end pooled internal rate of return (IRR) for the 12 months ending June 2016, compared with 4% for the S&P 500 using an apples-to-apples metric developed by investment advisory firm Cambridge Associates. The gap was even larger in Europe and Asia-Pacific. And private equity continues to outperform over longer time horizons as well.
As we explain in Bain & Company’s newly released Global Private Equity Report 2017, one strand of the returns story bears watching: The spread between buyout returns and public markets—and within buyouts, the spread among fund performance quartiles—has narrowed in recent years. To understand why, let’s look at a few underlying trends.
Buyout returns have slowly trended downward. The PE industry has matured and become more competitive, with many more participants and massive amounts of capital competing for a limited set of deals. Outsized returns that general partners (GPs) could earn on once-common undervalued assets are harder to find today.
Therefore, the gap has tapered between the average performance of buyout funds and public equity markets. Over time, one would expect average PE returns to settle at the level of public market returns plus an illiquidity premium. The best funds, though, will continue to outperform by a wide margin.
