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Buyout Fund Performance: What Do We Know? Where Are We Headed?

This article explores the performance of buyout funds, examining factors such as internal rate of return (IRR), multiples, risk-adjusted performance, and historical returns. It also discusses the characteristics of buyout fund portfolio companies and the use of subscription credit lines. The article provides valuable insights for investors and industry professionals.

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Buyout Fund Performance: What Do We Know? Where Are We Headed?

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  1. Buyout fund performance:what do we know?Where are we headed? Jim Kane, CFA, CAIA UNITE HERE! Workers’ Capital Conference – September 10, 2018

  2. How does the industry present returns data? *vs S&P 500 Index return (including dividends) Source: American Investment Council

  3. IRR vs Time weighted Return *Assumes 10 year investment period

  4. “You can’t eat IRR”-Howard Marks (July 2006) • Internal Rate of Return (IRR) • Multiple (on committed capital) • Percentage of capital put to work • How fast capital was put to work • Timing of investment harvesting and distributions • What LPs were able to do with uncalled or returned capital • What LPs could have done with capital was called or not returned • The amount of risk taken

  5. Public market equivalent (PME) Harris, Jenkinson, Kaplan (2014): • Buyout funds have outperformed the S&P 500 in the 1980s, 1990s, and 2000s. • The average fund returned at least 20% more than a dollar invested in the S&P 500. • Outperformance of at least 3% per year.

  6. Characteristics of buyout fund portfolio companies Compared to S&P 600 Small Cap Index: • Smaller market capitalizations • Overweight consumer discretionary sector • Underweight financials sector • Higher leverage Source: L’Her et al (2016)

  7. Risk-adjusted Performance Source: L’Her et al (2016)

  8. Dry powder (Global) Source: Preqin

  9. Historical returns vs invested capital Source: Chan et al (2018)

  10. Buyout multiples (U.S) Source: Pitchbook

  11. Subscription credit line Distortions Facility use of 6+ months: • Boost IRR by avg. of 200 bps on the front end • Boost IRR by avg. of 100 bps on the back end • Potentially boost IRR by total of 300 bps • Potentially move up a quartile Source: Cambridge Associates (2018)

  12. Secondary buyouts (U.S.) Source: Pitchbook

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