This analyst note utilizes a simple methodology to gauge the risk/ return profile of buyout funds by analyzing the dispersion of fund returns over a 12-year period between 2000 and 2012. To do this we take the Sharpe ratio, which is generally used to analyze risk-adjusted returns of an individual fund, and apply that to groups of funds across different strategies, sizes and vintages. The analysis begins with a comparison of risk/return profiles between buyout funds and other private market strategies, then focuses solely on buyout funds across different vintages and sizes.
The most surprising result of analyzing the risk/return profile of private market funds over a 12-year period between 2000 and 2012 was how poorly the 649 (2000-2012 vintages) venture capital funds in our sample have performed.
Buyout funds with less than $100 million in committed capital have the highest median IRR out of all fund size buckets; however, they also have the highest risk, with a standard deviation for realized returns of 32.3%.
The median IRRs for 2004-2006 vintage buyout funds dropped to as low as 8% and had the lowest risk-adjusted returns compared to other vintages.