Portfolio Design: A Modern Approach to Asset Allocation

RETURNS ON BUYOUT FUNDS

Consider now the returns on buyout funds. Cambridge Associates provides a private equity series that includes buyout funds, but also includes mezzanine funds. Buyouts, however, represent the most important component of this series. In a report on all private equity funds with vintage years from 1976 to 2004, Thompson Venture Economics shows that buyouts totaled $556 billion, while mezzanine funds totaled only $51 billion.10 So buyouts constitute more than 90 percent of private equity (excluding venture capital). The CA series, which begins in the second quarter of 1986, covers 70 percent of the total dollars raised by leveraged buyout and other private equity firms over this period.

Table 10.4 reports on private equity returns from the second quarter of 1986 when the CA series begins through the second quarter of 2009. The table also reports on the returns on the broad stock market, as represented by the S&P 500 and the Russell 3000, and returns on two small-cap indexes. The returns on private equity exceed those of the broad stock market by about 4 percent per year. It’s also interesting to compare the private equity return with that of small-cap value, since presumably many of the firms targeted for buyouts are in the value space.11 The premium of private equity over the Russell 2000 Value Index is also high at 3.7 percent.

TABLE 10.4 Returns on Private Equity Compared with U.S. Stocks, 1986 (Q2) –2009 (Q2)

Data Sources: Cambridge Associates LLC U.S. Private ...