Fausto Boni @ 360°

Performance Benchmarks

 

I recently reviewed an EVCA research paper co-authored with Thomson Reuters called “Pan-European Survey of performance 2008"

The main conclusion of such paper  (not to surprisingly indeed) was that ranked by stage and location on a 5 years horizon European Buyouts is the best performing asset class with a +16,2% return while European Venture is the laggard with a meagre +0,6% . The same conclusion could be reached by looking at results for so called “top half” and “top quartile”.

 

Research also apparently seems to dig in the issue deeper and pushes itself into analysing the J curve effect on vintages, publishing results by vintage group and stage it states that “the normal life cycle for Private Equity funds  requires at least 6 years to deliver substantial returns” (implicitly assuming that the length of the J effect shall be considered the same for buyout as for venture !).

 

I’m pretty sure that if we had access to the raw date we’ll find out quite a few flaws. For example I’d be ready to bet that there is no correction factor on the masses under management vs vintage age and therefore, given the very short history of the European Venture sector, the long term return comparison is very much penalized by the “weight” of historically “bad” vintages such as 99-2000.

 

One of the most obvious flaws in the analysis becomes extremely apparent by looking at the last section of the report “Scope and methodology” where list of funds contributing to the survey are listed and where of course most of the top performing European funds aren’t mentioned at all. As everybody knows that in Venture Capital more than any other Private Equity Segment performance varies very substantially from top to bottom quartile. Quartile analysis have been included in the survey, they just forgot to explain that top quartile surveyed is by no mean the real top quartile in EU.

 

Of course such figures were extremely pleasing to the EVCA Madrid Symposium audience (to whom such study was first presented last month) and quickly allowed notoriously smart and forward thinkers LP to go on stage with proclaims “The European Venture Industry has absolutely no reason to exist” and other similar absurdities.

 

I honestly believe the LP market in Europe in particular still has to go through the cleanup process experienced by the venture capital industry in the last five years but I’m now fairly confident that by letting them go full speed into the large buyout fund segment for a few more year will help such cleanup to (finally) occur there too.

Private Equity firms IPO ? No thanks !

I've recently read a fairly large number of articles and analyst comments on the news that Blackstone's stock price is down more than 50% since IPO this summer. Commentators go on in discussing and debating the reason for such collapse, which is my view was one of the most predictable one in history.

It might sound a litte extreme as a view but I'm firmly convinced that management companies of asset managers and private equity firms should never never go public for a number of reasons among which:

1. They don't need raise cash to develop
2. Business relies heavily on people should find ways to retaain key people rather than proving liquidity to their shares
3. The performance fee related income is by nature highly volatile in the mid term... while the excess management fee they show as profit is basically result of a market imperfection that at some point will go away
4. Their founders and private shareholders are way too shrewed as investors not to know all of the above.

A couple of extra question marks comes to my mind when I think to this specific situation:

How can financial analysts, bankers and private bankers be that naive in not wondering why should they buy stock from the group CEO and founder in such a context ?  and Most Importantly in my personal view: why should mature multibillionaires executives and entrepreneurs (such as founders of such firms) hurt their own reputation by screwing up small shareholders ?