PE Returns and Investor Access to Funds?
I have a question about the mechanics and returns of PE funds
This is paraphrased from a fund's website
--
Date 2021 - Following the realisation of XXX, we announce the close of fund ABC, generating a 3x return and 36% IRR
Fund ABC invested between 2010 and 2014
--
Now is this 36% IRR based on a Future Value and Present Value and a 4 year time period between 2010 and 2014? Surely if the fund is only fully realized in 2021 then investors only actually have access to their money in 2021
In which case in reality, the fund returned 3x between 2010-2021 because investors can only re-invest funds in 2021 and so its "locked up" until then
--
In which case that's not amazing is it? S&P 500 is 4x since 2010
Any clarification would be great thanks
Ha, didn't know WSO verified prospects. But to answer your question, when a fund realizes a portco, those proceeds are returned to their LPs. Once a fund is fully deployed, the GP doesn't hold all proceeds from realization until the full fund has been realized.
.
This announcement is in reference to the overall fund return, which accounts for all of the investments in the portfolio. So, the fund generated a likely 3.0x gross return (multiple of invested capital) and a 36% gross IRR.
This IRR is the since inception return of the fund. Distributions likely began as soon as the fund exited its first investment (assume no recycling of proceeds). PE investments are held generally held for 3-7 years (or longer as demonstrated in this case), so there are distribution being returned to LPs through the life of the fund, though typically distributions are weighted toward the latter half of the fund's life (generally 10 years + extensions).
So is this performance good? That depends. The 3x and 36% returns are gross. These returns do not factor in the management fee (generally 1.5% to 2.5%) or carried interest (~20%). Versus the S&P, its possible that this fund underperformed. But we'd need to know more--what was the fund's mandate? If private equity energy, for example, that performance would be quite strong, outperforming the S&P 500 Energy public market equivalent and absolute smoking the relative benchmark (CA or Preqin Natural Resources). If this a tech-focused buyout firm, then you might view the performance as in line with the market or maybe a bit disappointing.
You can also search for the shortcomings of IRR as a measure. Eg It is influenced by cash flow in the early years.
Quos est aliquid quia ut quam dolore est voluptatibus. Voluptatem nihil quae sit enim molestias nihil. Quod dolores reiciendis ut sed rerum illo.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...