Returns from private equity investments turned negative in the third quarter last year, marking an abrupt end to a 12-quarter streak of positive returns, according to State Street.
The firm's GX private equity index revealed that overall returns fell to -1.37% in Q3, the biggest decline since Q3 2011, against a backdrop of volatility in the public markets. Prior to that the index had seen uninterrupted positive returns across 12 quarters, which was the longest winning streak in the index's 20-year history.
State Street Global Exchange senior vice president Will Kinlaw said: "With growing uncertainty about the global economy and a big spike in public capital market volatility over the past six months, it's no surprise that the private equity market is taking a pause."
There have only been 10 quarters in the index's history where declines were larger, including: Q3 1998 at the time of the Russian debt default, Q4 2000 as the dot-com bubble imploded, Q3 2008 through Q1 2009 during the global financial crisis, and Q3 2011 when the Index dropped by 5.1% amid fears of a Eurozone crisis.
The index, which is based on directly sourced limited partnership data, represents more than $2.3trn in private equity investments, with 2,462 unique private equity partnerships, as of 30 September 2015.
"There has been a spike in exit activity over the past several years, with private equity managers returning capital to investors faster than they are calling it," he added. "This has been the trend for 16 quarters, and while it did not reverse in Q3, it has slowed sharply. Managers are being a lot more selective."
The poor results come as pension schemes continue to look to the asset class as a way to diversify their investment portfolios. State Street's forthcoming research of more than 100 institutional investors globally finds a majority expect their private equity allocations to increase over the next five years.
• Total realised proceeds from exits declined in the second half of 2015, dropping by nearly 17.8% in Q3 and by a further 16.4% in Q4 2015.
• All three major private equity strategies, buyout, venture capital and private debt, posted negative quarterly returns in Q3: -1.63%, -0.51% and -1.27%, respectively.
• Among sub-strategies within buyout, mega and large buyout recorded -1.94%, while mid and small buyout only dropped by 0.11%.
• Private equity funds outside of the US and Europe, primarily made up of emerging market funds, had a volatile quarter: performance dropped from 4.47% in Q2 to -3.13% in Q3 2015. European-focused private equity funds recorded a return of 0.29% in the third quarter, benefiting from a tailwind in the euro to US dollar exchange rate. Private equity funds in the US posted -1.43% and -1.25% quarterly returns, respectively.
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