The findings suggest that institutional investors would be well-served to consider recent performance an especially important component of fund due diligence — while bearing in mind, of course, the standard chestnut that past performance is no guarantee of future performance.
For vintage 1995-2010 buyout and related funds, I found that top-quartile funds, as measured by IRR, were followed by top-quartile funds 38 percent of the time. Another third of the time (33 percent) they were followed by second-quartile performers. Just 14 percent of the time are top-quartile funds followed by third-quartile performers. And just 15 percent of the time do successive funds managed by the same firm drop from top quartile to bottom quartile.
Another way of putting it: More than two-thirds of the time (71 percent), top-quartile and second-quartile funds follow in the footsteps of top-quartile predecessors. By comparison, last year’s analysis of a slightly smaller database spanning vintages 1995-2009, or one fewer, found the comparable figure to be 62 percent.
Institutional investors would also be well-served to give second-quartile funds a close look. In our database they are followed by top-quartile performers 30 percent of the time, and by second-quartile performers another 31 percent of the time. Just 11 percent of time does a bottom-quartile fund follow a second-quartile performance.
All told this year, Buyouts gathered IRRs for 933 vintage 1995-2010 domestic and international buyout, turnaround/distressed and growth equity funds from institutional investors that make their returns public. Of those, I identified a clear successor for some 362, which were then used in this analysis. (See table on page 12 for more details on methodology.)
Meantime, the data suggests weak performance persists as well — another result that is consistent with last year’s analysis. Bottom-quartile funds followed bottom-quartile funds 41 percent of the time. Well over half the time (59 percent) bottom-quartile funds or third-quartile funds follow bottom-quartile performers.
|Correlation of fund performance|
|If your prior fund was top quartile, your next fund will be…|
|If your prior fund was second quartile, your next fund will be…|
|If your prior fund was third quartile, your next fund will be…|
|If your prior fund was fourth quartile, your next fund will be…|
|Source: Analysis of Buyouts returns database|