BVCA says 2007 returns higher than expected

The years leading up to 2007 generated rising returns for buyout firms, as investors made use of highly favourable conditions in the credit markets.

The latest performance figures for 2007 show the third consecutive increase in average internal rates of return made by private equity firms in the UK, despite the closure of the credit markets in August 2007.

Net internal rates of return to investors by UK private equity firms rose to 17.3 percent per annum in 2007 from 16 percent in 2006.

Returns will continue to be strong.

John Gripton

The performance was compiled from funds raised between 1980 and 2003 and measured to 31 December 2007 by PriceWaterhouseCoopers, a Big Four accountant, Capital Dynamics, an alternative asset consultant, and the British Private Equity and Venture Capital Association, the UK industry body.

The years leading up to 2007 generated higher than expected returns. Over the 10-year period leading up to 2007, internal rates of return by private equity firms were 20.1 percent; during the five years prior to 2007, returns were 27.3 percent; and during the last three years they were 38.8 percent.

John Gripton, a managing director at Capital Dynamics, said: “We’ve been through an excellent few years of returns for private equity and we still believe it will deliver over the next 10 years. Returns will continue to be strong, but if you look at average returns over a 10-year period, they tend to settle at around 15 percent.”

He said the rapid recapitalisations and the buoyant investment conditions of recent years were highly appreciated by private equity professionals, but investors could not expect such conditions for investment other than for short pockets of time. 

Ashley Coups, a director at PwC, said: “Private equity is about long term capital returns, which were clearly very strong over the last ten years.”

He said that while market problems would cause private equity firms short term problems, he was cautiously optimistic about the year for buyout firms. “In the first quarter of 2008 you’ve seen no big deals, but there’s been plenty of activity stimulated by the capital gains tax changes [in the UK, which saw CGT raised from 10 percent to 18 percent in April] in the mid-market. It’s a challenging year but I don’t think we can say it is going to be a poor year.”