Private equity returns off 24% but still ahead of the broader market

Buyout funds suffered most over the 12-month period, generating an internal rate of return of -28%. Funds of funds, venture capital and mezzanine fared much better at -19.4%, -16% and -14.2%, respectively. Distressed private equity's IRR dropped only 13.7%. "Only"? While that does sound like a grim performance on its own, consider it in the context of both private equity and equity market performance over the past year, which ended in June and doesn't reflect some of the progress financial markets have made since then. Preqin also points out that the private equity sector has outperformed the S&P 500 by 10.3 percentage points over the past three years and 21.2 percentage points over the past five.

"One-year private equity returns as of 30th June 2009 are poor," says Etienne Paresys, Head of Research for Preqin, "but there has been a noticeable improvement in terms of net horizon IRR returns and net asset value compared with the previous quarter. This improvement is in line with the growth of the public markets during the same period."

Paresys continues, "With public markets continuing to improve over the course of Q3 2009, we expect to see private equity returns improving further as September data becomes available. The private equity industry continues to post higher returns than the main public indices, proving to be a valuable asset class for institutional investors."

Yet, there remains a profound difference between "getting better" and "good." Private equity numbers are going to suffer outsized declines until we pass through the third quarter (in terms of reported data), at which point we'll be comparing current quarters to those that happened after the decline of Lehman Brothers and American International Group (AIG) in September 2008.