Private equity and public equity returns in the U.S. are starting to converge, according to a recent private equity report by Bain & Co.
Over the past 30 years, U.S. buyouts have generated average net returns of 13.1%, compared with 8.1% for an alternative private-market performance benchmark, based on the Long-Nickels public market-equivalent method and using the S&P 500 as the proxy, the report said.
Over a 10-year period, U.S. buyouts did not offer much of a premium over the S&P 500 public market, the report said. In the 10-year period ended June 30, U.S. buyouts earned 15.27% compared to 14.7% for the S&P 500 and 13.45% for the Russell 2000 indexes, Cambridge Associates data shows.
From 2010 to 2019, buyout returns in the U.S. and Europe were mainly driven by selling portfolio companies at higher valuations than they were purchased, known as multiple expansion. Half of the increase in enterprise value in the decade in the U.S. and Western Europe was due to growth in multiples, a Bain & Co. analysis of CEPRES data for about 430 fully realized buyout deals shows.
Meanwhile, leverage in buyout deals has increased. Transactions with debt greater than six times earnings before interest, taxes, depreciation and amortization increased to about 75% from less than 25% in 2008 and 2009.
"The true leverage of many deals may be even greater, as banks commonly allow borrowers to calculate (debt) multiples based on projected earnings instead of actual results," the report said.