Top-Quartile Funds Repeat 39% Of Time: Buyouts Analysis

For its analysis Buyouts looked at a pool of 808 domestic and international buyout, turnaround and growth equity funds with vintage years spanning 1995 to 2008; the data comes from public pension funds and other investors that make their returns public. Of those 808, Buyouts identified 97 top-quartile funds based on IRR that have a clear successor for which we also could identify the performance.

As shown in the charts below, a top-quartile fund repeats as a top-quartile performer 39 percent of the time. Another 24 percent of the time the subsequent fund is second quartile; 22 percent of the time the next fund is third quartile; and 15 percent of the time the next fund is bottom quartile. Persistence of performance is also strong among bottom-quartile performers; their sponsors are more likely to be third quartile (33 percent) or bottom quartile (35 percent) the next time out.

Meantime, a preliminary draft study making the academic rounds this year finds that after 2000 U.S. buyout firms haven’t repeated their top-quartile performance at a higher rate than 25 percent, although it does find persistence in pre-2001 top-quartile performers, and it finds bottom-quartile persistence in all time periods. “It used to be true, but seems to be less true,” Tim Jenkinson, professor at the Saïd Business School at the University of Oxford, said of the persistence of top-quartile performance of U.S. buyout funds in an interview with Buyouts earlier this year (Buyouts, April 8). The draft paper he co-authored is dated April 2013 and is titled “Has Persistence Persisted in Private Equity?” Other academic research, including a separate paper co-authored by Jenkinson looking at data for U.S. and European deals, has also supported this finding.

Buyouts did not find a major difference in results for top-quartile funds when looking only at post-2000 funds, although our sample size, at 47 funds, is very small. In an e-mail to Buyouts, study co-author Steven N. Kaplan, professor at the University of Chicago Booth School of Business, offered a possible explanation for any discrepancy. He pointed out that their paper studied a sample of U.S. buyout funds; our analysis included turnaround and growth equity, as well as international funds. “It is not standard to mix domestic, international, private equity and distress,” wrote Kaplan. “They are different asset classes. LPs look at funds within those classes separately.”