Excess returns on private equity investments have peaked to their highest point at an average of 35% compared to public equity markets, during market downturns, according to a study conducted by Golding Capital Partners and professor Oliver Gottschalg from the HEC School of Management Paris.
The research – based on Golding Capital Partners’ database holding information on 4,300 private equity transactions between 2000 and 2021 in the US and Europe – showed that private equity deals generate excess returns of 25.7% when markets are booming.
During a period of market growth of 5-15% per year, instead, private equity generates returns (alpha) of 10.87% and in times of what the research identifies as stable markets (-5% to +5% per year) it produces 4.99% in excess returns.
Private equity transactions generate 9.9% returns compared with similar equity market transactions across all market phases, the study added.
Alpha is higher (23.95%) if private equity investments are held for a short period of two years or less, which the study calls flip transactions. Excess returns of 16.94% are produced within a holding period of two to four years, 9.7% with an holding period of four to six years, and 3.03% if private equity investments are held for a period of over six years.
The research also showed that returns are highest in the utilities sector at 17.2% and for the communication services sector at 15.5%, while private equity transactions in the real estate sector had by far the lowest returns (2.31%).
In terms of deal size, returns are higher in the lower middle market (12.47%), and upper middle market (12.04%), while for small caps returns can stand at 11.50% and for large caps at 8.58%. Transactions in Europe carry higher excess returns (10.27%) compared to the US (9.62%).
Golding Capital Partners has conducted the analysis for the first time with an emphasis on “human expertise” as one of the main factors for private equity transaction performance.
“Our study clearly shows that with private equity investments individual human expertise is the driver, in contrast to stock markets. For investors, this means it is not a good idea to rely automatically on the size or reputation of a given fund manager,” said Jakob Schramm, partner at Golding Capital Partners.
He added: “When selecting fund managers, they rather have to understand how the team is put together and what the individuals involved have contributed in the past.”
Jeremy Golding, founder and managing partner of Golding Capital Partners, said: “Experienced asset managers with a good network can really add value here […]. Once again the numbers are unequivocal – private equity offers enormous return potential.”