German private equity funds record strong 2019 performance

eFront, the leading financial software and solutions provider dedicated to Alternative Investments, has published its latest annual Global Private Equity Performance Series, which shows that active buyout funds in German-speaking Europe saw a remarkable jump in performance in 2019. VC funds in the region, meanwhile, recorded the strongest performance growth globally. Overall, the year was a positive one for global private equity performance, with most regions seeing rising returns as well as falling risk.

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Key findings:

The headline performance for DACH LBO funds remained steady during the year, with selection risk increasing slightly as the top 5% of funds did better.
But this masks a major disconnect between active and liquidated funds. Active funds recorded a remarkable jump in TVPI to 1.60x (improving by 0.31x) and IRR to 10.9% (increasing by 5.13 percentage points).
Liquidated funds went in the opposite direction, with a severe decline after five DACH-focused LBO funds were liquidated upon exits that did not deliver as expected. However, headline performance is mixed and the DACH market still has a long way to go to move close to the trendline.
Although still below the trendline, DACH venture capital funds, meanwhile, recorded the highest increase of both their IRR and TVPI among all regions.
This evolution was led by active funds: their IRR increased by 2.35 percentage points to a still modest 3.3%. Should they replicate such an increase in the coming year, DACH VC funds would reach the trendline.

Analysis

2019 was a positive year for global private equity performance, with most regions seeing rising returns as well as falling risk. In fact, every market operating below the risk-return trendline saw performance improvements during the year, with the exception of Eastern Europe and Russia.
It was also the year the Nordics overtook traditional leaders Benelux and the UK, to become the world’s top performing private equity market, helping Western Europe consolidate its global lead in private equity (see Figure 1). However, despite the positive performance overall, this was in a year in which a number of the very top performers saw modest declines in returns, including the UK, the US, Benelux and the Nordics, as well as China and Hong Kong.
Meanwhile, France improved its private equity performance above the risk-return trendline, while Spain crossed the psychological 8% threshold as its performance improved slightly. Benelux retained its crown as king of the LBO markets in 2019, but the Nordics closed the gap with a strong year for exits (see Figure 2). Nordic funds also registered a massive drop of their extreme selection risk, falling from 67.5% to 46.3%.
French buyouts also had a strong year for distributions and performance, improving its IRR slightly to reach 12.1%, while its top quartile funds pulled away further from the bottom quartile. This trend was even more pronounced in Spain, where the top 5% of funds now outstrip the bottom 5% by 1.24x. Spain also recorded an increase in IRR of 58 basis points to reach 9.1%.
Overall, Western Europe remained stable while the US and the UK experienced respectively a decrease in IRR of 14 and 25 basis points. Despite IRR falling 52 basis points during 2019 (now at 9.91%), Chinese and HK BO funds remain attractive due to their low levels of selection risk. The extreme and the most frequent selection risks in China are 32.6% and 7.4%, compared with the global averages of 43% and 14%.
DACH funds remain well below the trendline, but active funds in the region saw a remarkable jump in performance, as their IRR reached 10.9%, up from 5.8% one year earlier, giving reason for optimism.
2019 was a great year for exits in most regions. The maturity of the French market grew from 43% to 62%, pointing at a strong level of realisations. The Nordics also recorded a dramatic increase from 50% to 68%, while Spain reached 61% from the last year’s 49%.