Poor Results for Captive Private Equity

March 10, 2010

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1174381_needlesCanada’s private equity marketplace adopted a new term last year in breaking out performance results  – and now we’re seeing the results. Captive private equity funds – typically  those controlled by large financial institutions, such as banks and insurers or big private firms – are now reporting “Evergreen” profits and losses. Formerly, these were grouped together with private independent funds.

What’s the difference?

Evergreen funds don’t pay their returns as cash back to the limited partners – the investors. Instead, they are recycled into the fund in search of future returns. Such funds might be listed as closed-end public stock companies. These kinds of funds have deeper roots elsewhere, but there there are a few in Canada. In fact, Thomson Reuters finds 78 Canadian funds report-worthy. How well have they done? The results aren’t pretty. Over the past year (ending June 30, 2009), both venture and mezzanine/buyout funds lost 20% or more. Over three, five and 10-year horizons, venture funds have made no money. Buyout/mezzanine firms have had a more respectable return – but only over a 10-year horizon – with a return of 21%. But that’s gross of fees. (Of course, when there are no net returns, there is no carried interest – on the 2 &20 model of 2% management fees and 20% of profits.)

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