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The Return Characteristics of PE Investments

Returns can vary dramatically depending on the type and stage of a PE investment. Historically, early-stage venture capital returns are higher than later-stage returns, which in turn are higher than buyout returns. Within buyouts, returns on small and mid-market buyouts tend to be higher than returns on large buyouts. This hierarchy corresponds with the differences in risk undertaken. Early-stage companies are prerevenue and the few winners can provide huge payoffs, more than making up for the many losers. In the buyout arena, firms are more mature, cash flow is positive, and business models are well-established. Risk is therefore lower, but so are the returns.

Fund Stage	20-Year Returns
All venture capital	19.2%
All buyouts	8.9%
Small buyouts	12.1%
Mid-market buyouts	11.6%
Large buyouts	11.9%
Megabuyouts	7.2%
Mezzanine	7.0%
S&P 500	8.2%7

As the chart suggests, longer-term returns follow the expected patterns. However, over short and even intermediate periods of time, returns can be quite unpredictable. For example, over the 10-year period ending 9/30/2010, venture capital returns were actually negative, whereas buyouts eked out a 4 percent return. Being the average for all reporting funds, this chart understates the possibility for returns if the investor has access to the top-tier performers.