Europe's private equity industry delivered returns of 11.8 per cent on average last year after management fees and interest charges were removed, suggesting the sector enjoyed robust performance compared with most listed equities, according to figures from Thomson Reuters and the European Venture Capital Association.

The best performing private equity funds were buyout funds, which generated net internal rates of return of 16.3 per cent, while venture capital funds returned 4.5 per cent. (IRRs take account of the complex timings in private equity investments). Within venture capital, development funds achieved the best returns (7.8 per cent), followed by the balanced funds (6.8 per cent).

Top-quarter funds produced strong returns across both venture capital (14.9 per cent) and buyout (34.2 per cent), with all top quarter private equity funds achieving an average net IRR of 23.5 per cent.

The figures, while they are based on averages which can mask outstanding individual examples and poor ones, show that the sector enjoyed a generally robust performance. Last year private equity firms came under often critical political and media scrutiny in the UK, problems heightened by the credit crunch which threatened to derail or delay deals.

Last year, by way of contrast, the Morgan Stanley Capital International World Index of equity returns in the world’s developed economies made returns of 9.04 per cent, including reinvested dividends.

"The private equity industry has produced strong returns for the year ending 2007 with average performance at 11.8 per cent annual return net of fees to investors. Although funding issues associated with the credit crunch have affected investment activity, private equity firms continue to demonstrate strong returns so far,” said Leon Saunders-Calvert, director of private equity and investment banking at Thomson Reuters.

As private equity is meant to be a long-term investment proposition, rolling three-year investment horizons may be more suggestive of how strong returns have been. The report showed that three-year indicators were positive for funds across all stages with an overall net return for private equity of 17.2 per cent. The five-year IRR continued its steady growth bringing returns for buyout funds up to 16.2 per cent.

When ranked by stages and geographic location on a five-year horizon, the best performers were European buyout funds (+16.2 per cent), followed by US buyout funds (+15.5 per cent), US venture (+8.6 per cent) and European venture funds, which barely managed to eke out a positive return at (+0.6 per cent).

The data blends together returns from funds started in different years to produce a set of average figures. Some analysts argue that investors get a more accurate measure by looking at how individual funds have performed based on the year they were set up, or their "vintage", since funds tend not to make money in their first few years until investments have had a chance to bear fruit.