Report Says Early P.E. Fund Performance Indicative Of Future

Mar 1 2011 | 2:29pm ET

The early performance of private equity funds can help predict future relative performance, according to new research from the alternative investment industry data provider Preqin.

Given that fund managers typically launch new offerings as they come to the end of the investment period for their previous vehicle (often around four years after closing their last fund), Preqin decided to determine the extent to which fund manager performance can be evaluated based on the relative performance of funds before they reach maturity.

To do so, the data provider compared the quartile positions of 2,500 buyout and venture capital funds in their fourth year of operation to the quartile positions of the same funds at maturity. Preqin also performed the same analysis for funds in their sixth year and then viewed the proportion of funds that change quartile from year to year.

The research, says Preqin, indicates that early quartile rankings are an “excellent” predictor of future relative performance for both buyout and venture capital funds.

Preqin says 50% of the buyout funds ranked in the top quartile in year four go on to be top quartile at maturity, with 75% beating the median, while 60% of VC funds in the top quartile at year four maintain top quartile position at maturity, with 76% beating the median.

On the flip side, funds returning a poor relative performance early on have trouble turning that around. According to Preqin, 51% of the buyout funds in the bottom quartile in year four remain there at maturity, while 60% of VC funds in the bottom quartile at year four maintain this position at maturity.

By year six, according to Preqin’s research, quartile rankings are even more important, with 67% of top quartile buyout funds maintaining that position at maturity, and only 11% failing to beat the median. In terms of venture capital funds, 73% maintain their position in the top quartile, with only 5% failing to beat the median. On the other hand, only 11% of bottom-ranked buyout and 7% of bottom-ranked venture funds in year six are able to turn things around and beat the median at maturity.

“Despite the fact that funds in their fourth year are still early on in their life-cycle, their performance relative to others provides an excellent indication of future quartile standings,” said report author Tim Friedman, a Preqin senior manager. “Institutional investors should pay careful attention to a fund manager’s quartile ranking for recently launched funds, and those considering purchases on the secondaries market should be extremely wary of bottom quartile funds. Of course, each fund must be assessed on its individual merits—there is a significant minority of funds that are able to overcome disappointing performance early on, with 12% of bottom quartile buyout funds in year four achieving top quartile status at maturity.”

Preqin says its interviews with investors also suggest increased scrutiny of existing relationships—re-ups are far from guaranteed as institutions carefully assess past performance and future prospects.

 


In Depth

Hedge Funds Take Interest In ‘Soft Deposits’

Nov 19 2014 | 11:56am ET

New York-based Winchester Equities, headed by Avi Benamu and Jack Hazan, funds soft...

Lifestyle

Cohen Buys $101 Million Sculpture

Nov 12 2014 | 9:17am ET

Steven Cohen was the sole bidder for a rare Alberto Giacometti sculpture at Sotheby...

Guest Contributor

Why The Big Money Is Going To Europe

Nov 14 2014 | 6:03am ET

Peer-to-peer lending was invented with the individual investor in mind. But despite...

 

Sponsored Content

    For Hedge Funds, Mastering Data Is Key To Success

    Nov 4 2014 | 9:45am ET

    Data management is important to every business, but for hedge funds, it is critical. FINalternatives recently asked Peter Sanchez, CEO of Northern Trust Hedge Fund Services, how fund managers can deal with the demands of managing data while at the same time remain transparent and abide by operational best practices. Read more…

Editor's Note

    Guidelines for Guest Articles

    Oct 22 2014 | 9:46am ET

    We are always looking for guest articles from hedge fund managers and buy-side firms.

    If you are interested in submitting a contributed piece for possible publication on FINalternatives, please take a look at the specs. Read more…

 

Futures Magazine

November 2014 Cover

Building a better market

Reg NMS created a huge bifurcation in equity markets and while much of what has followed has been positive, in terms of lower fees and greater liquidity, many traders would like to see the market come...

The Alpha Pages

TAP July/August 2014 Cover

The Alpha Pages Interview: Senator Rand Paul

Senator Paul sat down in the debut series of the Alpha Pages Interview to discuss the broken tax code, regulation surrounding Bitcoin, and his plans for the 2016 Presidential election.