Sponsors whose funds end up in the bottom quartile of their vintage year by IRR have a 42 percent chance that their next pool will also end up in the bottom quartile, according to an analysis of this year’s Buyouts returns database—see charts below. Another quarter (24 percent) of successor pools to bottom-quartile funds make it into the third quartile, and the same percentage make it into the second quartile.
Altogether this year Buyouts collected IRRs for 870 vintage 1995-2009 domestic and international buyout, turnaround/distressed debt and growth equity funds from nearly three dozen institutional investors that make their returns public (see p. 46 of the Sept. 1 edition for more on our methodology). From this pool, Buyouts identified 326 funds for which it was possible to identify a successor. Noteworthy is that we could only find successor funds for 55 bottom-quartile funds, compared with 99 top-quartile funds; however, our fund database is not complete, and it is not possible to draw any hard conclusions from that result.
The results of this year’s analysis on the persistence of performance in private equity roughly mirrors that of last year’s analysis. Once again Buyouts finds that top-quartile funds are the most likely of any quartile to be followed by a top-quartile successor—38 percent of the time this year, down a tick from 39 percent last year. Our results are at odds with recent academic research on U.S. buyout funds showing that the persistence of top-quartile performance has tailed off after 2000. Possible explanations include the inclusion of international funds in our sample, as well as growth equity and turnaround funds.
One of the more interesting results of this year’s research is that across the board the most likely quartile for a successor fund to land in is the quartile of the predecessor. Second-quartile funds in our sample beget second-quartile successors 30 percent of the time; third-quartile funds beget third-quartile successors 33 percent of the time.
But the past isn’t always prologue. Sponsors made it to the top quartile following a third-quartile fund performance a healthy 23 percent of the time in our sample. Top-quartile successors follow second-quartile funds more than a quarter of the time (27 percent).
Even 11 percent of successor funds to bottom-quartile funds completely turn things around next time out to make it into the hallowed top quartile. Such are the risks of putting too much emphasis on the performance of a single fund.