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2007 mega-buyout funds saw mixed returns, despite performance fears

Adam Lewis

For the private equity industry, the first three quarters of 2007 were not a bad time to be out raising money from LPs. Despite warning signs in the housing industry, the US economy was still in a bull market, and interest rates set by then-Federal Reserve Chairman Alan Greenspan were still low. Banks, in turn, were dishing out aggressive loans that allowed PE shops to place heaps of debt on portfolio companies.



By 4Q 2007, the economy began to wobble, then eventually came crashing down, in large part due to the subprime mortgage crisis. The next year and a half would go on to be known as the Great Recession, as the S&P 500 dropped nearly 57% from October 2007 to March 2009.



But the mega-buyout funds of $1 billion or more raised in 2007 didn't produce the dire results that many expected, according to a recent

PitchBook analyst note. Overall, there were 62 funds of $1 billion or more that year, including six vehicles that brought in at least $10 billion. That includes a massive $21.7 billion fund raised by

Blackstone and a $15.1 billion fund raised by

Warburg Pincus, among other vehicles.



For the most part, the results for the broader group of mega-buyout funds were mixed.



"For the 2007 vintage, the pooled TVPI multiple is 1.50x and the median is 1.45x, both of which beat 2007 vintage funds from smaller size buckets," per the analyst note. "Furthermore, the bottom-quartile rate for mega-buyout funds (5.55%) compares favorably to other size groups, trailing only funds of $250 million-$500 million. These stats suggest that mega-buyout funds have preserved capital better than investors may realize."



There were obviously some failed investments from that year, including the eventual bankruptcy of Energy Future Holdings after

KKR, Goldman Sachs and

TPG Capital purchased the company through a then-record $45 billion LBO. But 2007's mega-buyout funds "provided relatively good downside protection," per the analyst note. Where they apparently came short was in delivering any level of outperformance. The top-quartile rate for this group of select mega-buyout funds checked in at 14.35%, which trailed funds in the two smallest categories by 300 basis points."


 


LPs typically expect private equity investments to outperform the public markets. After all, why else put up with the hefty management fees? That didn't happen for 2007 buyout funds, but they weren't far off.



"As a whole, 2007 buyout funds have underperformed public equity markets, posting a PME of 0.96," per the analyst note. "As the PME calculation is capital-weighted, mega-buyout funds predictably mirror the broader group, delivering a PME of 0.97 while smaller vehicles fared slightly worse at 0.94. ... The PMEs below 1.0 are disappointing; however, it is worth noting that this comparison against public equities includes a period with one of the longest bull markets on record (albeit with one of the steepest selloffs, too)."



Flash forward to 2019.

US buyout fundraising is approaching the record amount raised in 2007, per PitchBook data. And Blackstone is expected to announce a record $25 billion buyout fund by year's end. With fears that a recession could be on the horizon, LPs can at least take solace in knowing the last batch of mega-buyout funds that preceded a financial crisis turned out all right.



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