Valuations bounce back to pre-crisis levels

Fund valuations have reclaimed nearly all of the losses experienced during the downturn. Funds climbed 7% in value in Q4 2010 alone, but carried interest prospects for boom-era vintages remains murky, according to Triago.

A rejuvenated global economy and GPs’ cost-cutting efforts have helped bring private equity portfolio values back towards pre-crisis levels, according to placement agent Triago's latest quarterly report. 

Buyout funds on average lost about one quarter of their value between June 2008 and June 2009 as the banking meltdown reverberated through the wider economy. But by the final quarter of 2010 fund portfolios had regained nearly all of that lost value, according to Triago's data. Fund values climbed 7 percent alone in the last three months of 2010 compared to the prior quarter. 

Productivity gains, improved profit margins and cost-cutting initiatives have “led to constant positive surprises in portfolio company earnings reports”, said a spokesperson for Triago.

The trend looks set to continue into the first quarter of 2011, said Triago, basing its prediction on initial fund reports as well as first quarter earnings increases at listed companies comparable to funds' underlying assets.

Despite the climbing NAV levels, funds raised during the period’s golden years from 2005 to 2008 “remain far from the hurdle rates that will trigger carried interest for GPs”, the report said.

The private equity industry’s 6,000 or so unrealised portfolio company investments are concentrated in boom-era vintages that purchased assets at the peak of the market, the report said.

With little prospect of carried interest in the near term, many fund managers from the hardest-hit vintages are likely to hold on to unrealised investments, focusing instead on deploying fee-generating dry powder, said Triago.