Emerging market private equity returns fall well short of investor expectations compared to those from developed markets, finds research* from Pevara, a unit of alternative investments software provider eFront.

For the period 2000-2011, returns fell short of limited partner expectations for both DM and EM investments, but significantly more so for the latter, according to Pevara.

LPs expect an average return of 12% from DM investments, and the only way to consistently meet this threshold is to have invested in funds within the top 5% performance-wise (see figure 1).

Top-quartile funds meet or exceed this expectation in only four out of the nine years considered, and pooled overall returns in only one. Median returns never exceeded 9%.

But the gap between EM performance and investor expectations is far wider. 57% of LPs expect an average return of 16% from EM investments. Yet funds in this top 5% performance-wise only exceed this threshold in six out of nine years (see figure 2). Top-quartile funds met EM expectations in only two of the nine years, and pooled returns never met the 16% target.

The pattern remains when the data only focus on venture and growth capital investments, given that EM investments are more likely to be in this area, noted the report.

On perhaps a more positive note for LPs, the research showed that last year, PE funds called (that is, drew down to invest) 35% less capital than in 2012, but distribution of capital again rose.

They called $22.94 billion in Q4, bringing total capital called to $83.55 billion in 2013. Meanwhile, they distributed $65.87 billion in Q4 and a total of $247.68 billion, compared to $193.6 billion in 2012 and $178.6 billion in 2011.

“For the third year running, distributions comfortably outstripped capital calls, suggesting this still remains a sellers’ market,” said the report. “The difference between capital distributed and capital called has never been greater over the last nine years than in 2013.

Prevara said: “This sluggish investment activity in some ways reflects caution in the face of high asset prices and a certain amount of skepticism towards the economic recovery globally.”

This was based on an analysis of all capital called and distributed by over 2,300 private equity funds, as well as data on flows sourced directly from LPs. The findings relate to data from Pevara’s quarterly Private Equity Navigator report – produced in conjunction with Insead.