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State Street: Buyout Fund Returns Soared in 2016

Buyout fund gains doubled last year, surpassing private debt and venture capital.

  • Alicia McElhaney

Buyout fund returns soared last year, outperforming other areas of the private-equity market, according to State Street Corp.

The State Street Global Exchange Private Equity Index returned 10.36 percent last year, jumping from 6.55 percent in 2015, according to a statement Wednesday from the firm. Buyout fund gains of 12.52 percent drove the results, beating venture capital and private debt.

“What we’ve seen is that valuations over the last few years have been relatively higher,” prompting buyout firms to exit their investments through a sale or initial public offering, said Will Kinlaw, global head of State Street Associates, the firm’s academic unit. “Private equity managers are taking advantage of that and returning capital to investors.”

The returns have helped fuel the tear buyout firms are on attracting fresh capital, with CVC Capital Partners recently raising the largest ever European buyout fund at €16 billion (about $18 billion) in just five months. The industry is sitting on a record level of dry powder amid signs the pace of investing may be slowing.

“Capital calls have slowed down a bit,” said Kinlaw. “It seems like there may be an inflection here where private-equity firms are getting more cautious.”

Firms have a record $881 billion of dry powder to invest, according to Preqin data earlier this month. Investor appetite remains high for the asset class, with buyout funds raising a total $54.4 billion during the first quarter, tripling the $18.3 billion garnered in the first three months of 2012.

State Street’s private equity index tracks three asset classes: buyout, venture capital and private debt. It’s based on limited partner data representing $2.5 trillion in private-equity investments at the end of last year, according to the firm.

Buyout fund returns last year doubled the 6 percent gain they produced in 2015, according to a State Street spokesperson. Private debt produced a 10.39 return in 2016, while venture capital gained 2.8 percent.

“It’s hard to predict what investment is going to perform best,” Kinlaw said. “It’s one of the reasons that institutions have a diversified book of investments.”