Falls in returns accelerate

Data from the Institutional Limited Partners Association shows secondaries was the worst performing strategy on a quarterly basis in the third quarter of 2016.

The decline in secondaries funds’ returns has sped up over the past year according to data from the Institutional Limited Partners Association (ILPA).

The ILPA Secondaries Benchmark delivered a year-on-year net internal rate of return of 1.5 percent in the third quarter of 2016, compared with the 10.2 percent year-on-year net IRR recorded a year prior. In the third quarter of 2014 ILPA’s secondaries benchmark had recorded one-year returns of 13.7 percent.

On a quarterly basis, secondaries was the worst performer across all benchmarks, delivering a 2.3 percent net IRR.

Source: ILPA

ILPA’s data comes as buyers lower their return expectations for 2017: a survey by intermediary Setter Capital released in January found buyers expected average gross multiples for secondaries will fall to 1.38x this year, compared with expectations of 1.41x for 2016 and 1.43x for 2015.

Pooled net IRRs for quarterly, yearly, three-year, five-year and 10-year comparisons for secondaries were also all lower than the ILPA All Funds Index, which benchmarks all strategies. Over the year the All Funds Index recorded a net IRR of 7.9 percent.

The ILPA benchmarks, based on 3,599 individual funds, recorded US dollar-denominated European focused private equity and venture funds as the best performers quarterly and yearly, delivering quarterly net IRRs of 4.8 percent and one-year net IRRs of 13.39 percent.

Distressed strategies were the next best performers in the third quarter, recording a 4.3 percent net IRR, while over the year the next best performers were Asia-Pacific private equity and venture capital funds which had an 11.9 percent net IRR.

Natural resources funds performed the worst, delivering a negative 0.2 percent net IRR.

US and Canadian private equity slightly underperformed the All Funds Index over the quarter, recording an IRR of 3.62 percent against the 3.65 percent of all funds, but over the year outperformed the All Funds Index by just over half a percent, at 8.51 percent.