Hilary Wiek, CFA, CAIA Lead Analyst, Fund Strategies & Sustainable Investing, notes that when Pitchbook last reported their benchmark returns, performance “was through June 2021.”
The research report also mentioned that vaccines “were available, masks were coming off, and many office workers had resumed their commutes.” Then came “the next wave of COVID-19, leading some to expect that the phenomenal returns of H1 2021 might see a pullback.”
The report from Pitchbook further noted that “looking at the one-year horizon IRRs through September 2021, however, the numbers are still incredibly strong, though preliminary Q4 numbers hint at a return to more normal levels.” It has “been astonishing how little the economic devastation many experienced during the pandemic has affected the performance of private market funds.” In fact, “a great deal have thrived,” the research report noted.
The report added:
“While some pockets of real estate, such as office and travel, have suffered, returns
to date indicate that the vast majority of private market funds were able to pivot to handle the challenges presented by the pandemic.”
Looking at 10-year numbers for the seven private fund strategy types, Pitchbook sees horizon IRRs that “range from 6.2% for real assets to 17.0% for both private equity (PE) and venture capital (VC).”
In the context of these figures, “the one-year returns are staggering—both on their own and in comparison.”
The report added that VC “rose 59.5%, secondaries were up 52.5%, and even funds of funds (FoF) posted a 50.9% return.” Normally, “a 46.4% return would be incredible, but among this cohort, PE was something of a laggard in the year through September 2021.”
There are reasons to be “apprehensive” about private market returns “going forward,” the research report noted while adding that many valuations “hinge on public market comparisons, so the Q1 2022 stock market declines point to a drop in private fund performance when those numbers are reported.”
In fact, while the S&P 500 and MSCI ACWI “were down 4.6% and 5.4%, respectively, smaller and faster-growing benchmarks did markedly worse.”
The Russell Midcap Growth benchmark “fell 12.6%, and the Nasdaq was down 9.1% in the quarter.” Given the profile of companies held in private market portfolios, “they are more likely to be similar to the constituents of the latter benchmarks.”
Hilary Wiek, CFA, CAIA Lead Analyst, Fund Strategies & Sustainable Investing, notes that secondaries funds, which stepped up to a new level of fundraising in 2020, “have also seen a large uptick in performance.”
Through Q3 2021, secondaries provided “a one-year horizon IRR of 52.5%, well ahead of the 37.9% pooled return of the overall private capital fund universe and vastly better than the 10-year secondaries return of 13.2%.”
The update further noted:
“While vintage years 2015, 2017, and 2018 have achieved returns largely from markups, as seen in the RVPI figure in the QoQ change in pooled cash multiples chart, a fair amount of secondaries returns have come from distributed capital and are thus realized and returned to LPs.”
The report added:
“Despite record distributions coming back to secondaries investors, the massive growth in commitments to secondaries has meant record drawdowns, as well, so distributions and contributions just about netted out in 2021, based on preliminary figures. The dispersion chart for secondaries managers has a few interesting vintage year results. For many vintages, the range between the top and bottom deciles is within 10%, a fairly tight spread. But in some years, the range can be much wider and skewed significantly to either the positive or negative, such as in 2008, 2009, and 2016.”
This phenomenon, less common in the strategies “with more funds in operation, is largely due to so few secondaries funds in each vintage year.”
To explain this simply, if the universe amounted to 10 funds in one year, “the very best fund would set the mark for the top decile, and it might be head and shoulders above the second-place fund.”