Private equity investors nab their highest quarterly returns in two years as buyouts boost results

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The increase in returns was driven by strong results from buyout houses (Source: Getty)

Private equity investors have continued raking in the cash, as data from financial services firm State Street shows returns rose by 3.95 per cent in the first quarter of 2017.

Investors have been receiving positive net cash flows throughout the first quarter and into the second, according to the firm's Global Exchange Private Equity Index (GXPEI).

The increase in returns was driven by strong performance in buyout funds and private debt, along with improvements in venture capital.

“We saw some pick-up in venture capital performance in the first quarter of 2017, driven largely by higher returns in the information technology sector which comprises close to 40 per cent of venture capital funds overall in the State Street dataset,” said Will Kinlaw, senior managing director and global head of State Street Associates.

“As the Standard & Poor's technology sector index recently surpassed its dot-com era high, it is not surprising that venture capitalists are gaining more confidence in technology startups.”

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Buyouts come up trumps

Venture capital funds rebounded over the quarter, from a relatively flat performance of 0.47 per cent gains in the final three months of 2016 to 3.5 per cent.

But buyout funds excelled, posting a 4.23 per cent gain in returns over the first quarter and continuing the niche's outperformance over the other two main strategies of venture capital and private debt for the fifth consecutive quarter.

A slew of big exits from buyout funds dominated the first quarter, such as CVC completing the £6bn sale of Formula One. Private debt came in middle of the road, as returns maintained a steady pace of increase with a 3.1 per cent gain.

Tech is still a winner

In terms of the industry focus, returns from IT funds gained by 5.43 per cent. Industrials came in a close second, at 4.46 per cent.

Energy-focused funds managed only a narrow increase in returns of 1.27 per cent, although this followed a huge increase of 7.02 per cent at the end of last year. 

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The weaker dollar during the first few months of 2017 played into the hands of Europe-focused funds, which generated a 4.09 per cent increase in returns. Returns from US-focused funds, meanwhile, increased by 3.93 per cent while those in the rest of the world gained 3.89 per cent.

Shadows on the horizon

As payouts to investors (limited partners) have continued to increase, the institutions over recent years have kept throwing their cash back into private equity funds.

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Since managers (general partners) are able to raise so much cash – firms such as Apollo and CVC have already broken records this year – they have more to spend, and prices of assets are being pushed up.

Yet State Street believes that the amount of dry powder, or cash which the managers have yet to deploy, could be decreasing.

“Over the past few years, the dry powder has been steadily increasing as a result of strong inflows from the limited partners and cautious capital calls by the general partners,” added Anthony Catino, managing director, Alternative Investment Solutions for State Street.

“As of the first quarter of 2017, we saw some early signs of a trend reversal as the total dry powder dropped from a peak of $488bn in May 2016 to $461bn in March 2017.”