Economic research private equity 2010

Private Equity 2010
www.TheCityUK.com
SIZE AND REGIONAL BREAKDOWN
Global trends The private equity industry has over the past two years
seen the biggest downturn in activity in more than a decade. Investments,
funds raised and exit levels were all well down on levels seen prior to the
economic slowdown. The industry nevertheless remains an important
source of funds for startup and young firms, firms in financial distress and
those seeking buyout financing. The UK remains the largest and most
developed private equity centre in Europe, second in size globally only to
the US. London is one of the leading international centres for the
management of private equity investments along with New York.
Investments According to TheCityUK estimates, $91bn1 of private equity
was invested globally in 2009, a significant fall from the $181bn invested
in the previous year (Chart 1). The 2009 total was more than 70% down
on record levels seen in 2007. Deal making however gathered momentum
during the year with larger deals announced towards the end of 2009. With
bank lending in short supply, the average cost of debt financing was up and
private equity firms were forced to contribute a bigger proportion of
equity into their deals (Chart 2).
Indicators for the first half of 2010 show that investment activity totalled
$55bn with private equity firms continuing to focus on investments in small
and medium sized companies. The half-year total was up slightly on the
same period in 2009 but well down on the period between 2005 and 2008.
Full year figures for 2010 may show a moderate increase on 2009 if the
gradual recovery in investments seen in recent months is sustained.
Private-equity backed deals generated 6.3% of global M&A volume in
2009, the lowest level in more than a decade and down from the all-time
high of 21% in 2006. This grew to 6.9% in the first half of 2010.
The economic slowdown is also having an impact on completed deals. Over
the next five years, over $800bn in loans extended on these deals are due

to be refinanced (Chart 3). Around 60% of this is in bank loans and the
remainder in high-yield bonds. While leveraged loan issuance for buyouts
in 2009 fell to a fraction of the levels seen prior to the economic slowdown,
high-yield debt issuance saw a three-fold increase to $210bn. Most of this
went into refinancing existing portfolio company debt as the high-yield
bond market filled the financing gap left by the decline in bank lending.
Buyouts’ share of total investments fell for the second year running in 2009
to 57% from 66% in the previous year, a direct result of the scarcity and
higher cost of debt. Despite an increase in the share of total investments,
venture capital deals were down by around a third in 2009. The fall in
investment activity and economic slowdown have more recently given a
boost to the secondary market for private equity where existing stakes are
bought and sold between private equity firms.
Funds raised fell by two-thirds in 2009 to $150bn, the lowest annual
amount raised since 2004. The difficult fund raising conditions have
continued into 2010 with half yearly figures showing a total of $70bn raised
in the first six months, slightly below the same period in 2009. The
average time taken for funds to achieve a final close more than doubled
1 Data from various sources may not be entirely comparable due to differing
methodologies. TheCityUK relies on public sources of data for this report, primarily
organisations that collect data and publish newsletters and reports for the private
equity community.

August 2010
Chart 1 Global private equity market
investments and funds raised
$bn
500
Funds raised
Investments1

400

300

200

100

0

2000
2002
2004
2006
2008
2010
2001
2003
2005
2007
2009
equity value of deals
Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, AVCJ data
1

Table 1 Top countries for private equity
investments and funds raised
$bn

--------2009----------------2008-------Investment Funds
Investment Funds
value raised
value raised
US
33
48
100
288
UK
12
32
8
65
China
7
13
9
13
France
5
12
3
15
India
3
11
4
8

Germany
3
10
1
3
Japan
3
10
2
3
Others
25
45
23
55
Total
91
181
150
450
Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, AVCJ data

Chart 2 Financing for leveraged buyouts
$bn, loan issuance
for LBO transactions
550

equity contribution to
leveraged buyouts (% share)

50

500
450

40

400
350
300
250
200

30

20

150
100

10

50
0
2000
2002
2004
2006
2008
2001

2003
2005
2007
2009
Source: Thomson Reuters, Standard & Poors, TheCityUK
0

Sponsored by:

1


TheCityUK
between 2004 and 2010 to almost 20 months and in some cases the final
amounts raised were below original targets. Prior to the economic
slowdown, the market saw intense competition for private equity
financing. The three years up to 2009 saw an unprecedented amount of
activity during which more than $1.4 trillion in funds were raised.
Funds under management
Private equity funds under management
totalled $2.5 trillion at the end of 2009 (Chart 4), slightly up on 2008.
Growth of funds under management in recent years has been due to lower
investment activity and an increase in unrealised portfolio investments, as
firms have been reluctant to exit their stakes in market conditions of falling
valuations. Funds available for investments totalled 40% of overall assets
under management or some $1 trillion. Around a half of this is allocated
for use in buyouts, $160bn for venture capital investments and the
remainder for use in acquiring real estate. A substantial amount of this
money needs to be invested over the next couple of years because
many funds impose investment periods beyond which the funds are under

obligation to return the money to investors.
Potential changes in financial regulation may place additional requirements
and restrictions on private equity funds. There is considerable uncertainty
around the detail of any future regulatory changes. In the US, lawmakers
passed a financial reform bill in July 2010 that will require private equity
funds with more than $150bn in assets to register with the the Securities
and Exchange Commission. In Europe, the proposed Directive on
Alternative Fund Managers may bring a number of changes including new
disclosure requirements, harmonised governance standards, and limits on
leverage. At this point, however, the provisions, and therefore the impact
of the Directive on European and foreign firms operating in the EU remains
unclear. The remaining stages of the legislative process are likely to
continue into the latter part of 2010.

Private Equity 2010
Chart 3 Maturity schedule of US high yield
debt
$bn, maturity schedule of US high-yield debt
(as of end-November, 2009)
350

Leveraged loans
High-yield bonds

300
250
200
150
100
50

0
2010 2011 2012 2013 2014 2015 2016
based on high-yield bond and leveraged loan maturities;
includes all US dollar denominated debt
Source: Bank of America Merrill Lynch

1

Chart 4 Private equity worldwide assets
under management
$bn

Unrealised portfolio value

2,500

Funds available for investment

2,000

The UK private equity market is the most developed outside the US. Private
equity funds based in the UK accounted for 13% of global investments and
5% of funds raised. Other large centres for private equity in Europe include
France, Germany, Sweden, Netherlands and Spain. New York and London
are the leading locations for private equity firms. Amongst the largest 50
private equity firms, 14 were headquartered in New York and 9 in London.

60%

46%

40%

40%

2007

2008

2009

54%

1,500
57%
1,000
53%

Regional breakdown of private equity activity shows that in 2009, North
America accounted for 36% of private equity investments, up from 26% in
the previous year (Table 1, Chart 5) while its share of funds raised
remained at around two-thirds of the total. Europe’s share of investments
fell from 44% to 37% during the year. Its share of funds also declined,
from 25% to 15%. While investments have fallen in most regions in recent
years, there has been a rise in the importance of Asia-Pacific and
emerging markets, particularly China, Singapore, South Korea and India.
This is partly due to the smaller impact of the economic crisis on this region
and better prospects for economic growth. The proportion of investors’
total private equity commitments going to emerging markets is likely to

double over the next couple of years.

60%

56%

59%

500

0

47%

44%

41%

2003

2004

2005

43%
2006

Source: Preqin; TheCityUK estimates

Chart 5 Regional breakdown of private

equity investments and funds raised
% share
100

80

Funds raised
2%
4%
11%
15%

Investments
6%
24%

25%

Private equity is a broad term that refers to any type of equity investment in an
asset in which the equity is not freely tradable on a public stock market. This also
includes public companies that are delisted as part of the transaction.

2

Other

21%

Asia/
Pacific

37%

Europe

36%

North
America

15%

60
44%
40
63%

66%

20
26%

Definition of private equity

6%

0

2008

2009

2008

2009

Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, AVCJ data


TheCityUK
Firms located in New York
accounted for 36% of funds
raised in the five years up to
2009.
Firms
in
London
accounted for 17% (Chart 6).

Private Equity 2010
Chart 6 London vs. New York - share of
private equity industry, 2009

Table 2 Private equity investments and
funds raised in Europe
$bn, 2009
Investments
Country of
Country of

manag. destination
6.6
12.4
UK
4.3
4.7
France
3.8
3.3
Germany
1.4
1.7
Sweden
17.4
11.3
Others
33.5
33.5
Total

Funds raised
Country of Country of
origin
manag.
7.7
3.7
3.0
2.7
1.3
1.1

0.6
0.6
10.0
14.5
22.6
22.6

UK trends The UK is the largest
European
centre
for
the
management of private equity
investments and funds (Table 2). Source: PEREP_Analytics, EVCA
Firms located in the UK have also attracted the largest proportion of
European private equity investments in recent years. Many factors
contribute to the attraction of the UK as a centre for private equity such
as: the availability of funds to invest; opportunities to make investments,
people with the necessary skills to source, negotiate, structure and
manage investments; and the availability of exit opportunities given the
large equity market.
Investments Worldwide investments of UK private equity firms mirrored
falls on the global markets and declined to £7.5bn in 2009 from £20bn in
2008 and £32bn two years earlier according to the BVCA survey of its
members (Chart 7). Investments were made in 987 companies in 2009,
the smallest number in over a decade, and down from 1,672 in the
previous year. Early indicators for 2010 show a pickup in activity. According
to figures from the Centre for Management Buyout Research, more than
£5bn of buyouts were completed in the first quarter. This was the highest
quarterly total for two years, and was driven by a surge in secondary

buyouts.
The UK private equity industry has become more global over the past
decade. In 2009, private equity firms in the UK invested 61% of their funds
in companies located overseas, up from 58% a year earlier. Over a half of
overseas investments were in Continental European countries, and around
40% in the US. The UK’s influence overseas is considerable, both through
direct investment from the UK offices of private equity firms and through
their offices overseas.

number
30
23

New York
London
Other

% share
50

47%

25
36%

40

20
30
15

10

14
9

20

17%

10

5
0

Headquartered
Five-year to end-2009
firms from Top 50
fund-raising total

0

Source: PEI 50 rankings

Chart 7 UK private equity investments
and funds raised1
£bn, funds raised (bars)

£bn, investments (lines)

35

35

30

30

25

25

20
20
15
15

10

10

5

5
2000
2002
2004
2006
2008
2001
2003

2005
2007
2009
1
data not comparable with EVCA data as it only includes
independent funds raised and BVCA member investments
Source: BVCA
0

A regional breakdown of investment activity in the UK shows that firms
located in London saw investment levels decline to £647m in 2009 from
£3.6bn in the previous year. London’s share of UK investments fell from
42% to 23%. The share of investments in other South-Eastern cities
increased from 15% to 39% during the year. Scotland’s share fell Table 3 Regional breakdown of UK private equity
investments
slightly to 11%. Most other regions apart from the North East
% share
experienced falling investment amounts in 2009 (Table 3).
2009
Funds raised in the UK totalled £2.9bn in 2009, significantly down on the
£23.1bn raised in 2008 and £29.3bn raised in 2007 (Chart 7). Overseas
investors generated around 60% of funds raised.
Secondary market for private equity, pools capital from investors to
purchase existing stakes in private equity funds. It has attracted
considerable investor interest in 2009. A record $17.5bn in capital was
raised during the year, up 85% on 2008 (Chart 8). The record fund
raising activity however did not translate into increased deal making
activity as potential sellers were unwilling to dispose of their assets at
the low prices buyers were offering. The market is likely to pick-up in

South East (excluding London)
London
South West
East of England
West Midlands
East Midlands
Yorkshire & The Humber
North West
North East
Scotland
Wales
Northern Ireland
Total
Source: BVCA

£m Number
of cos.
199
1,162
647
190
115
66
66
36
45
74
36
132
70

56
124
55
188
47
39
315
52
63
13
1
834
2,957

£m Number
of cos.
39
24
22
23
8
4
2
4
5
3
4
4
7
2

7
4
6
6
11
5
2
6
2
100
100

3


TheCityUK
2010 as there has been a narrowing of bid-ask spreads. According to
Preqin, Europe has seen a surge in secondary buyouts in the first quarter
of 2010, with 24 secondary buyouts announced during the quarter,
representing $7bn in aggregate deal value, surpassing the $5.1bn in
aggregate deal value from 43 secondary buyouts in the whole of 2009.
There is probably some $100bn of private equity interests that will become
available for sale over the next two to three years. North American fund
managers dominate the secondary market with close to a half of funds
purchased in this region in 2009. Europe accounted for 42% and Asia for
most of the remainder.
FINANCING STAGE AND INDUSTRY BREAKDOWN

Private Equity 2010
Chart 8 Global private equity secondary

market
Total secondary funds raised, $bn
17.5
15.0
12.5
10.0
7.5
5.0

Private equity investments and funds raised can be categorised according
to the financing stage into: venture capital; buyouts and special situations.
Buyouts generally account for the bulk of investments by value due to the
significantly larger size of such deals compared with other investments.
Venture capital accounts for the majority of investments by number.
Investments Globally, buyouts’ share of the value of private equity
investments dropped in 2009 to 57% from 66% in the previous year as
difficulties in obtaining bank loans to finance deals persisted for the
second year running (Chart 8). A general deleveraging has occurred over
the past two years. According to TheCityUK estimates, equity contribution
to leveraged buyouts rose to over a half in 2009 from 43% in 2008 and
33% two years earlier (Chart 2). Venture capital investments were down
by about a third in 2009 from recent years’ levels (Chart 10).
The biggest buyouts in 2009 and the first half of 2010 included the $5.2bn
acquisition of IMS Health Inc by TPG Capital LP, the $3.9bn acquisition of
Talecris Biotherapeutics by Grifols SA, and the $3.4bn acquisition of
Springer Science Business Media by GIC Special Investments PTE/EQT
Partners AB. These deals however were small compared with some of the

2.5
0.0

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Source: Probitas Partners; Dow Jones

Chart 9 Private equity investments by
financing stage
% share of
investments
2008

100

Buyouts

Venture capital

2009

80
64%

66%

36%

34%

57%

59%

60

40

20

41%

43%

Private equity activity
Investments represent the financing of businesses through venture capital,
buyouts and other forms of financing.
Venture capital represents investment in companies that have undeveloped or
developing products. Investments can be classified into:
- Seed stage: Financing provided to research, assess and develop an initial
concept before a business has reached the start-up phase
- Start-up stage: Financing for product development and initial marketing.
- Expansion stage: Financing for growth and expansion of a company which is
breaking even or trading profitably.

0
UK
World
UK
World
Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, BVCA, AVCJ data

Chart 10 Venture capital investments
$bn

150

120

- Replacement capital: Purchase of shares from another investor or to reduce
gearing via the refinancing of debt.
Buyout funds typically target the acquisition of a significant portion or
majority control of businesses which normally entails a change of ownership.
These are generally investments in more mature companies.

90

60

Special situation includes a range of investments such as distressed debt,
equity-linked debt, project finance and leasing. This category includes
investment in subordinated debt, referred to as mezzanine debt financing.

30

Fund raising refers to the money investors have committed to private equity
funds in any one year.

0

Divestments represent the realisation or exiting of a private equity investment.

This is generally done by: selling the company; writing off the investment or
floating the company on a stock market.

4

Asia and other
Europe

US
2000
2002
2004
2006
2008
2001
2003
2005
2007
2009
Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, AVCJ data


TheCityUK

Private Equity 2010

large buyouts in the years preceeding the credit crisis (Table 4). Buyout
managers are shifting funds to distressed debt, bankruptcy financing,
private investments in public equity, emerging markets and financial

institutions. In the UK, management buyouts and buyins generated 36%
of private equity investments in 2009. Expansion stage companies
accounted for 36% with the remainder split between replacement capital
and early stage investments.
Funds raised Globally 57% of funds raised in 2009 are expected to be
allocated to buyouts, down from 66% in the previous year. Of total funds
raised in the UK in 2009, over 80% of capital is expected to be invested in
buyouts (Chart 11).
Divestments (exits) Private equity firms buy companies in order to sell
them at a profit at a later stage. This has become more difficult since the
start of the economic slowdown. Private equity exit transactions in which
portfolio companies are sold to a buyer or another private equity firm
totalled $81bn globally in 2009, down from $151bn in the previous year,
and the lowest amount since 2003. Divestment activity has however
gradually increased during 2009. Both sales to corporations and sales to
other private equity firms were down in 2009, while IPOs increased as
recovering equity markets made them viable exit alternatives.
Data for the UK shows that in 2009 divestments totalled £3.9bn. The
biggest proportion of divestments came from write offs and trade sales
(each accounting for around a quarter of the total), repayment of
preference shares/loans (8%).

Chart 11 Private equity funds raised by
expected stage of investment
% share

100

Buyouts

Venture capital

2009

2008
7%

19%
34%

80

43%

60
40

81%

93%
66%

57%

20
0

UK

World

UK

World

Source: TheCityUK estimates based on PEREP_Analytics,
Thomson Reuters, EVCA, PwC, BVCA, AVCJ data

Chart 12 Global private equity divestments
$bn, amount divested
400

IPOs

350

Secondary sales
Sales to corporations

300
250

Industry breakdown High-tech, consumer, communications and other
services sectors have attracted a large proportion of private equity
investments worldwide over the past decade. In the UK, consumer
services generated 23% on investments in 2009 (down from 22% in
2008), followed by industrials 15% (down from 27%), consumer goods
15% (up from 5%) and financial services 11% (unchanged).

150

100
50
0

2000
2002
2004
2006
2008
2001
2003
2005
2007
2009
Source: Dealogic

STRUCTURE OF THE PRIVATE EQUITY MARKET
A private equity firm is usually structured as a limited partnership, where
the general partner receives capital from limited partners (pension funds,
hedge funds, etc), and pays the managers, advisers and lenders out of
fees.
Investors in private equity
The number and variety of
groups that invest in private
equity have expanded to include
a wide range of investors. The
majority of capital comes from
institutional
investors
with

long-term commitments and
new categories of investors such
as sovereign wealth funds.
Banks
were
the
largest
providers of capital in Europe in
2009, with 18% of total funds
raised, followed by pension
funds and fund of funds with

200

Chart 13 UK private equity divestments
£bn, amount divested, 2009

Table 4 Largest private equity transactions
Announcement year

$bn

Largest private equity transactions (2009-1H 2010)
3.9
Talecris Biotherapeutics
3.1
Bridas Corp
3.0
Interactive Data Corp
2.1

Healthscope Ltd
1.7
Michael Foods Inc
Largest private equity transactions (all-time)
TXU (2007)
Equity Office Prop. Trust (2006)
Hospital Corp. of Amer. (2006)
RJR Nabisco (1989)
Harrah's Entertainment (2006)
Clear Channel Comm. (2006)
Source: Fortune

43.8
38.9
32.7
31.1
27.4
25.7

Write-off

Other
32%

Sale to another 6%
private equity firm
8%

27%

27%

Trade sale

Repayment of
preference
shares/loans
Total: 3,878m
Source: BVCA

5


TheCityUK

Private Equity 2010

around 14% each (Chart 14). The next largest
providers were government agencies 12% and
insurance companies 9%.
Overseas investors accounted for nearly 60% of
funds raised in the UK. The US accounted for 37%
of total overseas funds, followed by China 9% and
France 7%. Pension funds and fund of funds were
the largest investors in UK funds each with around
18% of the amount raised in 2009. They were
followed by banks and insurance companies with
17% and government agencies 6% (Chart 14). In
early 2010, the UK Government began the process
of distributing funds from its £200m UK Innovation

Investment fund. The fund is focusing on early
start-up firms in life sciences, digital and advanced
manufacturing business.

Chart 14 Sources of new funds raised
% share, 2009

Other
33%

Insurance
companies

36%

9%

12%

14%

Government
agencies

4%
6%
Private individuals
Government
agencies

17%
Banks & insurance
companies

Total: $22.6bn

Table 5 Largest private equity firms
Firms ranked by amount of capital raised for direct
private equity investment in 5 years up to end-2009
Goldman Sachs Principal Inv. Area
New York
The Carlyle Group
Washington DC
Kohlberg Kravis Roberts
New York
TPG
Fort Worth (Texas)
Apollo Global Management
New York
Bain Capital
London
CVC Capital Partners
New York
The Blackstone Group
Boston
Bain Capital
New York
Warburg Pincus
London
Source: Private Equity International

Chart 16 Institutional investment in
private equity
Average allocation as a
% of total assets
Family Offices/
Foundations

ISSUERS

Private equity
fund
Private equity
fund
Private equity
fund

Direct Investments

Special
situation
Buyouts

Source: Federal Reserve Bank of Dallas, EVCA/Thomson Reuters/PricewaterhouseCoopers

8.3%

Asset managers

Start-up

Replacement
capital

8.9%

Endowment plans

Seed
Venture
capital

6.5%

Public pension funds

5.0%

Private sector
pension funds
Sovereign
Wealth Funds

4.3%
3.7%

Insurance companies
0
Source: Preqin

6

Fund of
funds

Source: PEREP_Analytics, EVCA, Thomson Reuters, PwC, BVCA

Expansion
Fund of Funds

Fund of
funds

18%

Total: £2.9bn

INTERMEDIARIES
Investing in private
equity funds

18%

14% Pension
funds

Chart 15 Private equity market
INVESTORS

Other

18%

Issuers As private equity is one of the most expensive forms of finance,
issuers generally are firms that do not have an alternative source of
financing such as a bank loan, private placement or the public equity
market. Firms seeking venture capital are typically young firms that are
projected to show high growth rates. Seed or start-up capital is the money
used to purchase equity-based interest in a new or existing company which
is not yet operational. Venture capital also includes early-stage capital
provided for companies that have commenced trading but have not moved
into profitability or proved its commercial viability. Later stage investments
where the product or service is widely available are also considered as
venture capital investments.

pension funds
endowments
foundations
bank holding
companies
- high-net-worth
individuals
- insurance
companies
- investment banks
- corporations
- sovereign wealth
funds
- other investors...

Pension funds

Banks

Intermediaries The growth in the private equity market over the past
decade is largely attributable to the emergence of private equity funds that
raise and invest funds from investors. Private equity funds are organised
mainly as limited partnerships. Investors who contribute to the fund’s
capital are the limited partners while professional managers running the
fund serve as the general partners. About four-fifths of private equity
investments flow through specialised intermediaries, almost all of which
are in the form of limited partnerships. The remainder is invested directly
in firms through co-investments (direct investing alongside private equity
firms) and other forms of direct investments.

-

UK

Europe (including UK)

2.6%
2

4

6

8

10

$bn
54.6
47.8
47.0
45.1
34.7
34.2
31.1
29.2
23.0
21.7


TheCityUK
Contribution to the UK economy
Over the past two decades, the UK private equity industry has invested over
£150bn in around 30,000 firms worldwide. The BVCA has drawn attention to the
significant contribution to the UK economy made by private equity:
- Companies that have received private equity backing in the UK account for
employment of around 3 million people, or 16% of UK private sector employees.
In addition private equity funds based in the UK employ several thousand
people.

Private Equity 2010
Chart 17 Private equity returns in Europe
5 year rolling net return, %
25
20

- Through investment overseas, the industry contributes to the current account of
the UK balance of payments through income and capital gains. Exports of
private equity backed companies grew by 10% annually over the five years to
2006/07 totalling a cumulative £188bn in export sales during this period.

15

- Sales revenue of private equity backed companies rose by 8% a year between
2001/02 and 2006/07 (Chart 19) totalling £1,331bn during this period. Private
equity backed companies contributed £35bn in taxes in 2006/07.

5

- Higher rate of return provides an attractive asset for institutional investors,
lifting prospective income of their clients.

Non-venture private equity investments include middle-market companies
that use the private equity market to raise finance for expansion or a
change in their capital structure. Public companies can also be issuers in
the non-venture private equity market. These companies issue a
combination of debt and private equity to finance a management or
leveraged buyout. They also issue private equity to help them through
periods of financial distress.
Agents and advisers are an integral part of the private equity market. They
represent “information producers” whose role is to place private equity,
raise funds for private equity partnerships and evaluate partnerships for
potential investors. The three main types of agents and advisers include:
those helping firms raise private equity through search and evaluation
services; those helping limited partnerships raise funds typically through

buyouts and distressed debt; and those advising institutional investors on
the placement of funds they have allocated to the private equity market.

10

0
-5
1985

1990

1995

2009
Private equity
10 years (% p.a.)

Pension assets1
FTSE All-share
Private equity
Pension assets1

5 years (% p.a.)

FTSE All-share
Private equity
3 years (% p.a.)

Pension assets1

An important reason for increased interest in the private equity market
since the 1980s has been the fact that private equity investments on
average have generated consistently higher returns than most public
equity markets and bond markets. As private equity investments are
generally medium and long term investments, one year returns are
inappropriate as a realistic measure of private equity performance due to
the volatility in returns.

WM All Funds Universe
Source: BVCA

Over the past two decades private equity has become broadly accepted as an asset
class. Investing in private equity contributes to portfolio diversification. Although
there is some correlation between returns on private equity and public equity and
bond markets the correlation is not high. For many institutions, the potential
higher returns of private equity investments over conventional asset classes
justify the higher risk of such investments. Private equity investments are
relatively illiquid, particularly in the early years. The life-cycle of an average
private equity fund investment averages three to seven years. Investors in private
securities generally exit their investment and achieve returns through an initial
public offering, a sale (to corporate buyers or another private equity firm), a
merger, or a recapitalization. As the companies are not listed on a public exchange,
investors wishing to exit their private equity holding do so by selling the holding
to another investor through the secondary market.

2009

Chart 18 UK private equity returns

FTSE All-share

Private equity as an asset class

2005

Source: Thomson Reuters; EVCA

PRIVATE EQUITY AS AN ALTERNATIVE INVESTMENT

A marked drop in returns was however seen in 2008 and 2009. One-year

2000

-5

0

5

10

15

20

1

Chart 19 Comparative growth
% annual growth, (2001/02-2006/07)
8

UK employment

Sales revenue

7
6
5
4
3
2
1
0
Private equity
FTSE 100
FTSE Mid-250
FTSE Mid-250 Private equity
FTSE 100
Source: BVCA

7


TheCityUK

Private Equity 2010

returns for European private equity averaged 3.1% in 2009. This included
a 3.5% return for buyouts and a negative 1.3% return for venture capital.
The private equity industry has produced strong returns in the years

leading up to the credit-crisis. The 5 year rolling net return in Europe
totalled 6.1% in 2009 (Chart 17) down from 8.5% in 2008. The long term
performance of the European private equity industry remains robust, with
net internal rate of return since inception to December 2009 remaining
strongly in positive territory, at 8.8% for all private equity, with buyout
funds returning 11.8% and venture funds returning 1.6%. The net return
of UK private equity funds measured at end-2008 was: 3 years 4.4%, five
years 17.3% and ten years 13.1%. Private equity in the UK significantly
outperformed a number of major indices such as the FTSE All UK equities
and WM All Funds Universe (Chart 18).
US institutional investors allocate an average of 7% of portfolios to private
equity, a higher proportion than the 5% share in Europe and 3% in Japan.
It is likely that private equity allocation from all types of investors declined
since the start of the credit crisis as investors looked for safe investments.
----------------------------------------------------------------------------------

LINKS­TO­OTHER­SOURCES­OF­INFORMATION:
BVCA

Thomson Reuters

Dealogic

Preqin

EVCA

PricewaterhouseCoopers

PEREP_Analytics

Private Equity International

www.bvca.co.uk

www.thomsonreuters.com

www.dealogic.com

www.preqin.com

www.evca.eu

www.pwcmoneytree.com

www.perepanalytics.eu

www.peimedia.com

Datafiles

­

Datafiles in Excel format for all
charts and tables published in this
report can be downloaded from
the Reports section of TheCityUK’s
website www.TheCityUK.com

Report author:

Marko Maslakovic, Senior Manager, Economic Research,
, +44 (0)20 7776 8977

Sign up for new reports
If you would like to receive
immediate notification by email
of new TheCityUK reports on
the day of release please send
your
email
address
to


TheCityUK Research Centre:

For further information about our work, or to comment on the programme/reports, please
contact:
Leslie Sopp, Head of Research
, +44 (0)20 7776 8979
TheCityUK, 65a Basinghall Street, EC2V 5DZ
www.TheCityUK.com
© Copyright August 2010, TheCityUK
TheCityUK is a new independent membership body, promoting the UK financial and related
professional services industry.
The CityUK’s key areas of activity include:
- Promoting the UK-based industry as a world leader offering unrivalled service and
expertise to partners around the world.
- Creating a partnership for a sustainable industry: demonstrating the industry’s role in
enabling growth and prosperity in the wider UK economy.

- Using research, insight, data and analysis to meet the needs of its members and to
provide the evidence to support our promotional objectives.

This report is based upon material in TheCityUK’s possession or supplied to us, which we believe to be reliable. Whilst every effort has been made to ensure
its accuracy, we cannot offer any guarantee that factual errors may not have occurred. Neither TheCityUK nor any officer or employee thereof accepts any
liability or responsibility for any direct or indirect damage, consequential or other loss suffered by reason of inaccuracy or incorrectness. This publication
is provided to you for information purposes and is not intended as an offer or solicitation for the purchase or sale of any financial instrument, or as the
provision of financial advice. Copyright protection exists in this publication and it may not be reproduced or published in another format by any person,
for any purpose. Please cite source when quoting. All rights are reserved.