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In the last couple of years, you would have been hard-pressed to find a market participant who did not say that they were expecting the market cycle to turn soon – though perhaps nobody anticipated the nature of the events that have played out during the first quarter of 2020. In this note we look at how private markets’ performance has varied across prior cycles, including the significant changes in performance dispersion across different periods. We will return to some of these themes in more detail in future notes. Whilst not the focus of this note, on most measures private equity has delivered consistently strong performance across vintage years both relative to public markets and on an absolute basis. In the current market environment, what is of more interest is the variation of vintage performance in relation to the two most recent major global economic cycles; the “Dot Com” bubble of the early 2000s, and the global financial crisis of 2008 (the “GFC”). The chart below shows the performance of private equity funds on a global basis by vintage year. Of course, given the drawdown nature of private markets funds, a private equity fund would typically [...]

An investment in a traditional liquid fund generally involves only two cash flows; the initial investment and proceeds on sale of the investment. Private equity funds are different – this article explains the typical cash flows that occur during the life of a Private Equity fund. This is for illustrative purposes only, actual performance and cash flows will vary. Past performance is not indicative of future returns. Initial Investment – With Truffle, your investment is fully funded upfront. This means that investors do not have to worry about having capital available at short notice to meet capital call payments from the underlying fund. Investment Period – This period, which is typically 4 or 5 years for a Private Equity fund, is where the fund manager makes its investments; i.e. buys companies as per its target strategy. Distribution Period – Following the end of the investment period, a fund will have the remainder of its life, usually 10 years in total (including the investment period), to sell (or “exit”) its investments. Following a sale of a company, the proceeds from that sale are returned to investors. Consequently, investors may expect to receive distributions from approximately year 5 [...]

Persistence of performance of Private Equity fund managers has been a topic of much industry and academic research. Whilst past performance is not indicative of future returns, there are some significant trends that investors should be aware of when selecting Private Equity fund managers. Quartiles Explained: The analysis shown here is based on quartile performance, a standard approach for measuring the performance of a Private Equity fund relative to its peers. This involves ranking all funds in the data set from top performers through to the lowest performers, and grouping them into “quartiles”. Top quartile funds are therefore the top performing 25%, whereas 4th quartile funds are the lowest performing 25%. Outperformance Persists Top performing funds tend, more often than not, to be followed by a fund that also outperforms. For example, 74% of top quartile funds are followed by a fund that has outperformed (i.e. in the top two quartiles). Less than 10% of funds following a top quartile fund are in the bottom quartile. Source: The Journal of Performance Measurement, Fall 2017. Notes: Percentage of large buyout funds that transition from a previous performance quartile to each current fund quartile. Results [...]

There is a significant body of research that suggests that over the long-term, Private Equity has on average outperformed public equity. However as an actively managed investment strategy, there is significant dispersion between the performance of Private Equity funds, and there is no investable benchmark or ETF. Note that past performance is not indicative of future returns. Outperformance of Public Equity When the average performance of Private Equity funds is compared to public equity market performance, Private Equity can be seen to outperform in most vintages. This analysis is made on a Public Markets Equivalent (“PME”) basis; this involves modelling the return that would have been generated in public markets if the same cash flows were invested as the actual private equity cash flows. Using data from Pitchbook Benchmarks, the average Private Equity fund has outperformed public equity markets (as measured by the S&P 500 index) in 75% of the vintage years from 2001 to 2016 (note that 2017 and 2018 vintage funds are still too immature to be included in the Pitchbook private equity benchmarks). Reasons for this outperformance can vary, though most market participants would point to the so-called “illiquidity premium”, a theoretical [...]