Back Funds While They’re Young For Superior Results: Buyouts Analysis

Sponsors on their debut funds in our database generated bottom-quartile, median and top-quartile IRRs of 1.6 percent, 10.1 percent and 18.1 percent; that compares favorably with the results for our entire data set, 3.3 percent, 9.7 percent and 17.9 percent. The spread of performance is slightly wider, suggesting investors would be taking a bit more risk with such funds.

Firms on their second and third funds did even a tad better than those on their debut funds, with slightly lower spreads, the analysis found. Sponsors on their second funds, for example, achieved bottom-quartile, median and top-quartile IRRs of 5.1 percent, 10.1 percent and 18.8 percent; those on their third funds achieved bottom-quartile, median and top-quartile IRRs of 3.3 percent, 10.6 percent and 18.6 percent.

All told for this exercise, Buyouts looked at the performance of 932 domestic and international funds characterized by us as buyout/corporate finance, growth equity and distressed debt/turnaround with vintages ranging from 1981 to 2008 (not all funds provide both investment multiples and IRRs). Of those, we confirmed or assigned a Roman numeral to 765, ignoring non-core funds and taking into account that some spin-out firms start with a high Roman numeral, although Buyouts would consider them to be a debut group.

By the time sponsors hit their fourth funds, our analysis suggests they may be getting a little conservative. Such funds exhibit a tighter range of performance than the overall data set, posting bottom-quartile, median and top-quartile IRRs of 4.9 percent, 9.5 percent and 16.4 percent. Our collection of sixth funds illustrates a similar tightening of performance spreads, although the performance of our set of fifth funds seems largely consistent with the low Roman numeral funds in our database.

Sponsors on Fund VII demonstrated the best top-quartile performance in our database of the groups we studied, delivering bottom-quartile, median and top-quartile IRRs of 4.0 percent, 8.8 percent and 20.6 percent. Our collection of Fund VIIIs and higher brought up the rear in this analysis of performance, but it is important to take into account context. This sample is relatively small and weighted more to recent vintage years, some of which have been historically weak—particularly vintage years 2005 to 2007. For firms on Fund VIII and higher in our analysis the bottom-quartile, median and top-quartile IRRs are 3.2 percent, 5.7 percent and 15.2 percent.