European private equity: data leads the way

The newly released Invest Europe ‘Performance of European Private Equity Benchmark’ report is a comprehensive and insightful treasure trove of performance data in private markets. This information and analysis are particularly valuable during stock market rallies as key asset allocation decisions between passive and active investment come into the forefront of LP minds. The report uncovers two clear points:

    (a) private equity and venture capital consistently deliver a premium, and

    (b) Europe stands tall across the board in the global private equity and venture capital landscape.

Across the spectrum from venture capital (VC) to private equity (PE), the well-known picture of high absolute returns is confirmed. Net internal rates of return (IRR) range from mid- to high- teens for growth/buyouts, with a broader range for VC, as expected, from low teens to the twenties. Remarkably, the return premium is fairly consistent, delivering 3-10% of alpha across different segments, regions, and timeframes.

Experienced practitioners in the market may well appreciate how precious this alpha generation is, when delivered at a scale touching trillions. The alpha picture is relatively consistent across segments and geographies, including those with rather different underlying growth rates and far exceeding developing markets in hard currency returns. This is despite the fact that these markets have distinctly higher underlying economic growth rates.

Notably the report confirms that performance between North America and Europe is substantially comparable, with returns generally in the same region and consistently delivering alpha across listed comparators.

In addition to net IRRs, where the sensitive formula calculations can be skewed by early returns or credit facilities, I find it crucial to consider 'money multiple’ returns and the speed of capital return. With the latter in mind, Invest Europe has helpfully included a pertinent ‘time to liquidity’ performance metric, which captures the time it takes from deployment to return the principal amount. This analysis highlights Europe's impressive performance in returning principal within four years, across both buyouts and growth capital, distributing capital more quickly than funds anywhere else in the world.

In terms of the money multiple returns, European private equity also exhibits strong performance, with buyouts achieving a 1.7x total value to paid-in (TVPI) multiple compared to a 1.25x public market equivalent (PME) for MSCI Europe and a 1.5x for even the top listed comparators included the S&P 500 and FT Wilshire 5000.

European Growth capital is ‘coming of age’ (less than half the funds in the database being classed as ‘mature’) with a corresponding ‘under construction’ current TVPI of 1.56x –and similar IRRs to European buyouts. European venture capital stands out with aggregate money multiples of over 2x, outperforming North American VC funds across multiple timeframes, even considering the correction from 2021 onwards – a picture perhaps at odds with popular narratives. This picture of a ‘golden decade’ of European venture is also set to benefit the development of the European growth capital asset class, as companies ‘graduate’ from the venture stage.

It is encouraging to note that next-generation managers in Europe are outperforming established managers across most timeframes. This new breed of highly experienced, entrepreneurial private equity leaders is smaller, nimbler and evidently able to deliver on the promise of superior risk-adjusted returns. This is confirmed by the experience of our own primary and direct co-investment/co-sponsorship activities at Federated Hermes Private Equity.

I am also excited to see that this edition of the report includes Invest Europe's first performance analysis of the infrastructure sector. This vital asset class, crucial for the climate transition journey, shows over 1.5x aggregate performance and high single-digit net IRRs.

As my fellow Invest Europe LP council member Frank Amberg notes: “As infrastructure evolves, investment opportunities expand beyond traditional assets (such as ports, airports, roads, bridges and utilities) to include areas such as energy transition and digitalisation. Although still relatively young, the infrastructure asset class has grown significantly, offering a variety of investment strategies, ranging from core to opportunistic risk return profiles. Over time, the quantity of data on liquidated funds will increase since infrastructure has become an essential element in strategic asset allocation and more and more investors have discovered the advantages of these resilient assets.”

Overall, the report demonstrates the continued strong performance of European private equity, significantly outperforming listed markets across timeframes. This suggests substantial value creation at play, more than a ‘leveraged beta’ to equity markets would deliver. The report highlights European PE performance is ‘standing tall’ across all segments, with mid-market buyouts driving with consistency growth capital maturing with track records deepening, and venture capital delivering exceptional returns on a wider range, as expected.

I hope these highlights will encourage global investors to take a data-led view of Europe, in shaping their global asset allocation.

Elias Korosis
Global Investment Partner, Federated Hermes Private Equity;
Vice-chair, LP Council & Chair-Elect, Invest Europe