The global financial crisis has underscored the importance of being able to analyse the risk and return characteristics of all investments, but in particular alternatives and unlisted assets. Greg Bright spoke with Christopher Ward, vice president of Boston-based State Street Investment Analytics, about recent trends.
Institutional investors have been gradually rebuilding their private equity positions for just over a year now, pushing uncommitted funds – the so-called “dry powder” of the industry – to record levels. There was an overhang of about $500 billion at the end of last year in the US and Europe.
Perhaps counter-intuitively, there has also been an uptick in contributions from private equity general partnerships to investors, according to Chris Ward, who oversees global marketing for State Street’s analytics business, which includes the private equity index.
That index, launched in 2008, tracks about 35,000 underlying investments and 3,000 unique partnerships, capturing and producing a range of performance data.
In recent months, Ward says, the private equity markets have been getting better: “We’re seeing a ‘V’ or ‘U’-shaped recovery. We’re seeing some seed-capital activity in the venture capital market. And we’re also seeing some secondary market activity.”
He says that the UK market was the most active during the years of drought – late 2007 to early 2009 – but the US still dominates activity in this asset class.
Ward, who has a background in venture capital prior to joining State Street in 2006, says that a recent increase in distributions from private equity general partners probably indicates their desire to keep investors happy after a few tough years.
“I know it’s counter-intuitive,” Ward says, “because you’d think that given there have been few raisings in the past two years they would want to retain as much as they could. But the fact is they have a lot of dry powder and I think they are thinking long term.”
State Street Investment Analytics provides a range of services for pension funds and managers around the world. These include: performance analytics and attribution; risk analytics; investment compliance and mandate monitoring; and its indices.
Ward says that the global financial crisis has meant that a lot of clients are focusing more on risk and transparency.
Similarly, there has been a sharp increase in managers and funds looking to outsource their measurement functions.
“The systems and technology required to provide best-practice analytics are becoming very expensive,” he says. “And getting the right staff is becoming more difficult too. We have about 500 people around the globe versed in all areas so we can leverage off that.”
State Street is the world’s largest provider of administration services to the private equity market.
“From the private equity analytics view, we sit between the general partner and the limited partner. We’re a third-party observer of the process,” Ward says. “We capture and produce all the data on performance.”
Private equity started to get some bad press even prior to the financial crisis, in the fallout from very large buyouts in various countries which appear, in hindsight, to have been overpriced.
During the crisis, pension funds became overweight to their unlisted assets because of less-than-frequent valuations while the listed markets tumbled daily – and measured daily.
Nevertheless the State Street private equity index, which has data going back to 1980, shows that the since-inception internal rate of return (IRR) for buyout-style funds has average 12.15 per cent; for venture funds 8.27 per cent and for mezzanine debt and distressed funds 10.95 per cent.
Geographically, the returns have favoured European private equity activity. The 1,404 US funds tracked, over all categories, have averaged an IRR of 11.21 per cent since inception. The 185 European funds have averaged 14.91 per cent and the 128 funds in the rest of the world only 5.09 per cent.