Annals of the University of Oradea: Economic Science (Jul 2014)
RETURNS OF PRIVATE EQUITY COMPARATIVE ANALYSES OF THE RETURNS OF VENTURE CAPITAL AND BUYOUT FUNDS IN EUROPE AND IN THE US
Abstract
This paper focuses on the returns of two segments of Private Equity (PE) market in Europe and in the US; Venture Capital (VC) and Buyout (BO). Contrary to the publicly traded stocks where information about the trade of securities is public, the measuring of the returns of these asset classes is not unambiguous. The returns of PE investments are considered as confidential information therefore we only have estimations about the real characteristics of the financial performance of the PE industry. Although it is impossible to observe the whole industry it is important to chart its performance because PE plays an essential role in the financing of firms, especially firms at special stages of their lives and the more information the investors and companies have, the more effective PE market can be therefore it can contribute to economic growth, employment, innovation etc. In the literature PE, VC and BO are not distinguished properly and they are often used as synonyms. Despite their similarities, there are significant differences in the features of these types of investments. In this paper the authors present the return characteristics of the PE industry of Europe and the US with regard to the stage-focus of PE funds. The key findings of this paper are that in average the returns of BO funds exceeded the returns of VC funds in the US as well as in Europe. Not just according to the absolute value of the returns, but also according to its risk-return tradeoff BO seems to be a preferable investment. The same statements can be made in case of the European market. The US returns are higher than European VC returns, because compared to the US VC industry the European is undeveloped. On the other hand the gap between the performances of BO funds is not as significant as the difference of VC funds. While in the 90’s US BO funds outperformed the European ones, after the millennia European BO returns were higher. The analysis of returns reveals the sensitivity of these asset classes to economic cycles. The ‘dotcom’ boom of the millennia affected greatly the PE industry as well as the recession of 2008. The first section of this article describes the different subsets of PE, than it shows the differences in terms of returns of the US and European market, than in the third part the paper compares the characteristics of the different classes of PE.
