Fund values see first surge since ‘07

Average private equity fund valuations were written up by 5.48 percent in the second quarter of 2009, according to unreleased, preliminary statistics from the State Street Private Equity Index.

The marked uptick in average fund valuations follows five quarters of valuation drops and will indicate to many market observers that private equity fund performances may have finally reversed their precipitous declines.

The State Street Private Equity Index tracks more than 1,600 private equity funds, largely from the 1990 vintage until the present, on a dollar-weighted basis, meaning that larger funds with a disproportionate amount of investor capital under management represent an equally disproportionate share of the performance in the index.

Although the Q2 5.48 percent average write-up in value will be greeted with cheers by some in the private equity industry, other statistics remain sobering. According to State Street, private equity as a global asset class at the end of the second quarter turned in a pooled, dollar-weighted long-term IRR of 9.08 percent – well below the projected long-term average target performance hoped for by institutional investors and their consultants.

That said, the interim numbers are subject to short-term influences. The State Street figures represent an unrealised rate of return calculated through a mix of the actual cash flows between general partners and limited partners and the more subjective assessments of interim value delivered to LPs by fund managers.
 
Many of the investments made between 2005 and the present have yet to be exited, and the interim values of these deals have by dint of “fair value” rules needed to track the calamitous pricing in the liquid markets. The recent resurgence in the public markets has generally allowed GPs to write up the values of their private equity portfolio investments.

In the more buoyant stretch of time between the first and the fourth quarters of 2007, State Street tracked average quarterly write-ups of 5.76 percent, 8.55 percent, 2.26 percent and 3.18 percent, respectively. With the collapse in the global economy, those valuation increases were followed by average private equity fund write-downs in the four quarters of 2008 of -0.87 percent, -1.51 percent, -8.35 percent and -16.32 percent, respectively.

The first quarter of this year saw an average fund valuation change of -6.46 percent, according to State Street.