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Tech Buyout Funds Outperform Since 2000

IT-focused buyout funds have outperformed the industry by six percentage points in the decade through 2016, according to Preqin.

  • Alicia McElhaney

Buyout funds targeting information technology investments have outperformed the industry for most vintage years since 2000, though the wide gap between the best and the worst performers is a risk for investors allocating capital to such pools, according to Preqin.

IT-focused funds have outperformed the buyout industry by six percentage points in the decade through 2016, producing a 13.9 percent internal rate of return, the alternative-assets data provider said in a report released Thursday. Top performers include TPG’s $378 million T3 Partners II, which completed fundraising in 2001 and reported a 93.9 percent gain in December, the report shows.

IT-focused funds outperformed the buyout industry as they benefited from the sector’s expansion to sell companies for billions of dollars over the past decade. But with this outperformance comes more risk: There’s greater dispersion among IT-focused funds than generalist buyout funds.

“Information technology-focused funds have shown some of the highest returns, in line with the incredible expansion of that sector over the past 30 years,” Christopher Elvin, head of private equity at Preqin, said in a statement on its report. “Investors should certainly be aware that while sector-specific funds can deliver some of the highest returns of any buyout fund, the potential for reward comes with increased risk.”

While thirty-six percent of IT-focused buyout funds produced net internal rates of return within the top quartile since their inception — the largest of any industry-specific fund — the gap between the best and worst performing funds, known as dispersion, is far greater than another other industry profiled by Preqin. The IT sector’s risk, which is calculated by finding the standard deviation of net internal rate of return, is around 35 percent, compared to around 20 percent for diversified buyout funds, the report shows.

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The global IT sector is expected to see revenues of $2.4 trillion this year, an increase of 3.5 percent over 2016, according to an International Data Corp. report in February. The firm estimated that global IT spending will rise to almost $2.65 trillion in 2020, representing a compound annual growth rate of 3.3 percent since 2015.

The IT buyout funds focused on Asia were the performing in the sector, the Preqin report shows. These investment pools produced a median 15.3 percent internal rate of return since their inception, compared with 14.2 percent for funds targeting North America and 13.5 percent for those mainly investing in Europe, according to the report.