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The Best — And Worst — Private Equity Vintages

BlackRock-owned eFront forecasts which fund years will thrive from this crisis and which vintages will get hit hardest.

Private equity funds raised in 2016, 2017, and 2018 will likely endure the greatest damage from the current economic downturn, according to eFront, a BlackRock-owned financial software and research company.

But funds closed in 2020 may fare quite well as they invest in companies at heavy discounts. 

To assess how these recent fundraises might fare, eFront looked at 20 years of data on U.S. and European leveraged buyout vehicles, including from the dot-com era and global financial crisis. 

“Funds will probably snap up attractive deals even during the worst of the crisis. Those will probably generate very attractive returns,” eFront said in its report, published Tuesday.

In predicting rough outcomes for vintage years 2016, 2017, and 2018, the firm cautioned that “the quality of fund managers within these vintage years will make a substantial difference.” 

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The financial software firm analyzed how net asset values tend to recover, depending on the vintage year, or when capital raising ended.

For example, 2001 vintages got hit while selling off their portfolios by the last global financial crisis, and may have put money to work. NAVs for 2002 funds dropped in the financial crisis, but the declines were limited and these funds fully recovered by 2010, eFront found. Funds raised in 2003 were done deploying capital by the time of the global financial crisis, and emerged relatively unscathed even though their NAVs fluctuated. 

The GFC hit 2005 and 2007 funds the hardest, and these vintages had the lowest overall performance in eFront’s sample. Funds from 2005 “made investments which rapidly gained value, then lost all of these gains, and then more,” Funds from 2007 were similarly hit at the beginning, and then again in 2010 through 2014, possibly by the European debt crisis.

With private equity portfolios valued on a quarterly basis, eFront’s study also looked at broad movement of the pricing of funds. The total value of the companies in a fund’s portfolio — the net asset value — somewhat mirrors the volatility of stock prices. But the funds’ values don’t tend to drop nearly as far as stock markets nor rise as high on the rebound. This is particularly true for U.S. leveraged buyout funds. 

Private equity firms are regularly criticized for their valuations, which can be subject to biases whether performed by internal or external experts.

But eFront attributed the lower volatility to a number of factors, outside of potential bias.

For one, private equity doesn’t generally go into banks, which are a big and sometimes volatile component of stock indexes.More importantly, private equity firms inject cash into their portfolio companies, react more quickly to downturns, and make other wholesale changes to operations during tough times, tempering the swings in company valuations. 

Private equity firms can also acquire companies, teams, or spin-offs during bleak times, which offset losses. “Fund managers can snap up good investment opportunities in difficult times, at attractive valuations. As a consequence, this can prop up NAVs during that quarter and the following quarters,” wrote the authors of the eFront study. “Essentially, indexes are buy-and-hold products, while private market funds are, by design, interim owners, constantly buying and selling companies.”

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