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Private equity funds drop 26% in 2008

Fund performance results from the State Street Private Equity Index show a big drop in the fourth quarter of 2008. Despite the grim numbers, private equity continues to outperform the public markets.

Private equity funds turned in an average 2008 performance of negative 25.76 percent, according to the State Street Private Equity Index, a performance tracker from State Street Investment Analytics’ Private Edge Group.

The grim one-year slide accelerated during the fourth quarter of 2008, during which private equity funds on average lost 16.32 percent of their reported values. The index tracks the performance of 1,522 private equity funds globally.

The fourth quarter marked the fifth consecutive quarter of losses for private equity funds, and was a nearly 800 basis point drop from the third quarter, during which funds lost 8.35 percent.

Private equity’s dismal 2008 came against a backdrop of crumbling public-market values. During 2008, the S&P 500 returned negative 38.49 percent. During the fourth quarter, the S&P 500 dropped 21.94 percent.

Despite the steep one-year loss for private equity, the State Street index still shows a modest 0.34 percent IRR for all funds over a three-year time horizon, and a 9.34 percent  IRR over 10 years.

William Pryor, senior vice president of State Street Investment Analytics, said in a statement: “In the fourth quarter of 2008, the private equity funds that had the highest exposure to the credit markets, either through highly leveraged portfolio companies or by direct investment in debt securities, experienced the largest losses of any private equity strategy as general partners wrestled with the impact of the global credit crisis on their interim valuations.”