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Buyout Funds Caught in Deal Slump Lag S&P by Most in Two Years

(Bloomberg)

(Bloomberg) -- Private markets are returning about seven times less than the S&P 500 as a slump in dealmaking forces buyout firms to delay payouts to investors. 

Private equity returned 1.46% in the first quarter compared with more than 10% for the S&P 500, according to data from State Street Corp. That marks the biggest performance gap in at least two years, according to data compiled by Bloomberg. 

Investors are getting scant compensation for the higher risk of private equity relative to listed peers and private credit. Private credit returned 2.17% in the period, the State Street index shows.

Lower valuations have forced buyout firms to push off secondary sales or initial public offerings, putting their cash flows deeper in the red while investors wait longer to reap returns.

Yet PE funds managed to pull off big 2024 fund-raising rounds and draw capital from them, while making meager distributions from older funds. 

“Net cash flows became more negative,” said Nan Zhang, head of product implementation and alternative investment research at State Street. “Large buyout funds from the 2024 vintage year started calling capital.”

Creative ways to keep generating income from their assets, which PE firms would normally look to sell within three to seven years, failed to make much difference to the bottom line.

A strong dollar is also suppressing returns at European funds, he said.

The State Street Private Equity Index is measured using interim quarterly valuations and daily cash flows from clients of the firm that invest in private funds. It follows more than 4,000 funds with more than $5.2 trillion in capital commitments as of the first quarter of 2024.

©2024 Bloomberg L.P.