Buyout funds continued to display resilient performance during a turbulent first quarter of 2023, according to NB Private Markets research.
The research – which analysed valuation changes across a broad sample of private equity funds – found small and mid-cap buyout funds, the largest asset class in the sample, were up approximately 3% on average over the quarter, in their reported currency. Buyout funds as a whole – including traditional buyout, value buyout/turnaround, and growth buyout/growth equity strategies – were up more than 2% on average in Q1, both in US dollars and reported currency.
Even though many listed equity markets climbed strongly in the opening quarter, with the S&P 500 up 7.5%, listed markets remained underwater over the 12 months to the end of the first quarter. For example, the S&P 500 total return index was down nearly 8%, while the Russell 2000 and Nasdaq were down more than 11% and 13%, respectively. In contrast, the average buyout fund was up more than 1% over this 12-month period.
The picture is less rosy for venture capital funds, where the valuations of high-growth companies – especially in technology sectors – were impacted by higher rates and declining multiples. On average, the venture funds in the sample were up nearly 2% in the first quarter, but this was buoyed by the positive performance of funds still holding the public stock of companies that listed in recent years. The median venture fund decreased in value by 0.2% in Q1 2023, on the heels of four consecutive negative quarters in 2022.
Prior to the market downturn, the venture funds in the sample experienced incredibly strong performance, with average annual increases in value of 37% in 2020 and 47% in 2021, respectively – far outpacing other public and private asset classes during the two-year period. But over the last 12 months, the average venture fund in the sample was down 12%. Interestingly, this is very close to the 13.3% decline in the Nasdaq total return index over the same period. But while the Nasdaq ended the calendar year 2022 down 33%, the average venture fund was down only half as much, at -17%.
Active management key to navigating turbulence
Managing more than $115bn in private market assets, Neuberger Berman has a unique vantage point in the ecosystem, enabling the group to see valuation information for more than 400 active private equity funds. Each quarter, the team analyses valuation changes as soon as updated marks are received.
“Private equity firms typically manage portfolio companies very actively. They tend to have significant operating resources at their disposal, and they can use their position of control or influence to respond quickly to the market environment,” Doug Manor, a managing director of Neuberger Berman, says.
“In recent years, this was paramount as portfolio companies faced supply chain disruption, geopolitical unrest, inflationary pressure, and higher interest rates. Away from the scrutiny of public markets, buyout firms continued to invest behind growth initiatives, make operational improvements, and pursue pricing strategies and accretive add-on acquisitions to maintain margins and grow cash flows.
“This active management allowed operating and financial performance to hold up relatively well for most private equity-backed companies, even in the face of economic volatility and declining public market multiples.”
In addition, Manor says private equity firms are generally both strategic and opportunistic in when and how to monetise assets. “Even though realisations and liquidity events slowed over the past year, the transactions that did occur were often at attractive valuations that exceeded the most recent quarterly estimates, delivering a further boost to performance,” he adds.