Doubling down on your winners can be an effective strategy in the stock market and horse racing—so why not in private equity? An analysis of several high rollers in the buyout business finds that they take something of a double-down-on-winners strategy to investing. And the approach tends to produce remarkably consistent results.
Buyouts recently compiled performance data publicly disclosed by nine institutional investors for pre-vintage-2003 U.S. and international buyout/corporate finance funds (see November 19 edition, page 28, for a complete list of investors, information on how we put the database together, and caveats). A close look at the portfolios assembled by seven of these individual investors (excluding
Just how much this double-down-on-winners strategy accounts for the returns that investors achieve is a question for greater mathematical minds than mine. But the investors in our sample did post remarkably similar returns in some respects. Median internal rates of returns generated by funds in the seven portfolios ranged from 10.5 percent to 17.4 percent; however, throwing out the bottom figure as an outlier produces a far narrower range of 13.9 percent to 17.4 percent.
We were also able to calculate total investment multiples—total distributions plus estimated values of remaining holdings, divided by total capital drawn by funds—for five of the investors in our sample,
It’s tempting to conclude that these five investors must have all backed the same funds. And, sure enough, the names of some fund managers—
So what is the key to out-performance for investors? Of the seven portfolios examined, Oregon, with $10.2 billion drawn down by a 68-fund portfolio, achieved the highest investment multiple, at 1.8x, as well as the highest median IRR for funds in its portfolio, at 17.4 percent. One fact that leaps out upon lining up the funds in Oregon’s portfolio by investment multiple is just how much the state owes to KKR for its strong performance. The state’s early, frequent backing of KKR funds in the 1980s delivered tremendous returns—an investment multiple of 2.4x on $1.9 billion invested. The returns of KKR funds of a more recent vintage have been solid, but less spectacular; they have to date produced an investment multiple of 1.7x on $3.3 billion invested for Oregon.
Hindsight being 20-20, it’s easy to sit back and suggest Oregon might have been better off flattening its support of KKR after the 1980s in favor of finding the next Secretariat. But faced with an industry where median returns are unspectacular, and bottom returns pitiable, you can’t blame investors for sticking with their top horses.