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The credit crunch trimmed returns for private equity funds in the third quarter of last year, according to research from US investment management firm State Street. Long-term annualised returns shrank slightly from 15.29 per cent in June to 15.03 per cent in September.

William Pryor, senior vice president at State Street, comments: ‘The tightening of credit conditions, especially in the US, has constrained deal flow during the quarter, as evidenced by the cancellation and postponement of several buy-out transactions.’

However, it was the venture capital sector, which is less dependent on debt, that showed the biggest dip in returns, from 13.23 to 12.42 per cent. Returns in the buy-out sector suffered a slighter fall, from 15.79 to 15.70 per cent, according to the research.

Outside the US, returns actually improved, which Pryor attributes to the continued weakness of the US dollar. Funds investing outside the US (which are also included in the figures above) returned 21.68 per cent, compared to 20.80 per cent in the second quarter.

State Street’s research is based on the performance of private equity funds worth a total of US$1.15 trillion (£586 billion). Its data is drawn from clients’ portfolios and not from the voluntary reporting of returns by private equity firms.

Click here to read more on how private equity buy-outs are being affected by the credit squeeze.