Private equity returns outperformed market in financial crisis


We've become accustomed to the notion that the Golden Era of private equity ended with a whimper in the wake of the financial crisis. The high water mark may have been the Fortune cover story on Steve Schwarzman in March of 2007, which pronounced him the "New King of Wall Street."

Since then, it's been a tough slog. But perhaps not as tough as people might think.

Fortune notes a new study by the HEC School of Management in Paris and German fund-of-funds manager Golding Capital Partners that "suggests that private equity deals done between 2006 and 2008 actually outperformed public equity investments over the same time period…The researchers studied 303 transactions made during those years, and found that the absolute return on (equity) through the end of 2011 was 5.1%. Doesn't sound too impressive, until you realize that the adjusted public equity market return was negative 15.4%. In other words, a private equity alpha of 20.5%. They also examined a slightly larger set of private equity portfolio companies that were active at the time of Lehman Brothers' collapse, and found a 5.1% alpha."

The article notes that the study only included portfolio exits, which means it did not include some of the most troubled deals, like Energy Future Holdings (formerly TXU).

Still, it may be that returns end up being better than expected over the long-haul. As the economy perks back up, some really tricky exits may finally take place, and the returns could be higher than now expected.

It's fair to say at this point that the big institutional investors have not given up on the asset class, though we're not likely to see the sort of fundraising we saw when back in the glory days. 

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- here's the article