Funds of funds continue ‘phenomenal run’ outperforming private equity markets with 14-game winning streak

Private equity funds of funds continued their “phenomenal run” with a 14-quarter streak of outperformance relative to the rest of the private equity universe, according to new data from PitchBook.

The impressive run followed eight straight quarters of lag between 2016 and 2017, a period during which many questioned whether fund-of-fund vehicles had had their day, given the need for LPs to expose themselves to two sets of management fees.

Not only have funds of funds outperformed since then, but they have done so by significant margins, reveals PitchBook’s latest Global Fund Performance Report.

In the year to Q3 2021, FoF returns were 50.9%, compared to an overall pooled fund universe return of 37.9%.

The report, however, warned that if private equity and venture capital succumbed to recent negative returns seen in public markets, less volatile, income-generating and inflation-protecting asset classes could instead spend their time in sun in the coming quarters.

PitchBook said, “Because FoFs include many specialists who only invest in one area, such as VC or Oil & Gas, the dispersion around FoF returns can be high.

“The 2009 vintage class had a 12.2% gap between the upper and lower decile limits, but the still largely unrealized 2016 vintage has a 27.7% gap.

“With the lower decile at 15.9%, however, even the worst performers have been above historical norms.

“Another recent highlight for FoF has been an impressive positive net cash flow profile.

“While most private equity strategies have been in a negative or slightly positive cash flow position, FoF in 2021 brought in $29.3 billion more than they called, a massive proportion for a strategy that only raised $29.6 billion in 2021.

“The excellent returns and positive net cash flow profile should bode well for FoF fundraising in 2022.”

PitchBook said PE returns cooled in Q3 2021, the last full quarter covered by the report, with returns dropping to 6.8% in the strategy – its lowest quarterly IRR since the pandemic hit. shook the markets in the first quarter of 2020.

Factors such as soaring inflation, rising interest rates, slowing quantitative easing and the prospect of quantitative tightening are rapidly changing the liquidity paradigm, he added.

Yields fell across all fund size brackets and regions, but greater resilience was seen from Europe and for funds under $500m.

Mega-funds of $5 billion and above continued to generate equity returns in the year through the third quarter of 2021, the report added, supported by a healthy exit market for larger assets. cash-rich companies.

PitchBook said the trailing year-over-year IRR for venture capital fell to 59.9% in the third quarter of 2021, ending five consecutive quarterly increases since the first quarter of 2020.

He said that despite the record release value in 2021 and a healthy release environment over the past few years, market conditions changed in the first quarter of 2022, with a sharp decline in release activity globally.

The report said, “We could see further declines over the next few quarters as exit markets tighten amid volatile macro and inflationary pressures.”

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