Private equity funds see short-lived revival

Private equity fund performance bounced back in early 2023, after negative returns at the end of 2022. But the recovery may have been short-lived.

The asset class marked a one-year horizon IRR of 6.6% in Q2 2023, a promising improvement from the -1.5% annual growth rate in Q4 2022, according to PitchBook’s latest Global Fund Performance Report.

What’s more, the industry’s performance improved quarter-over-quarter with one-year IRR jumping 5.7 percentage points from Q1 to Q2 2023.

After a couple of quarters with negative marks, PE fund returns turned positive in Q4 2022 and continued to rise in 2023.

Year-over-year, fund returns made a complete reversal, from returning -2.82% in Q2 2022 to generating 2.94% returns in Q2 2023.

Funds valued at over $1 billion experienced the most pointed quarterly improvement as they leaped from a one-year IRR of 0.6% to 6.7% in Q2 2023.

Funds sized at under $250 million came out on top in Q2 with 9.2%. And for the four preceding quarters, these smallest funds consistently outperformed their peers.

Still, in the latter half of 2023, high interest rates and fewer exits staunched deal flow and capital distributions to LPs. It came in as the second-weakest year for global M&A activity, after 2020. Total deal value had fallen 35.5% from its 2021 peak.

PE returns fell to 0.3% in Q3 2023, according to the report’s preliminary data, an indicator of potentially declining fund performance toward the end of the year.

The dearth of deals also slowed the rebound in fund performance across all asset classes, with preliminary data showing returns climbing only 0.2% in Q3.