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Early PE fund quartile rankings ‘highly relevant’, says Preqin study

The early quartile rankings for both buyout and venture capital funds are an excellent predictor for future relative performance, according to the results of a study by Preqin.

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

Poor relative performance early on in a fund’s life proves to be extremely difficult to turn around. Some 51% of 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 quartile rankings are even more important – 67% of top quartile buyout funds in year six maintain this position at maturity, with only 11% failing to beat the median. Some 73% of venture capital funds maintain their position in the top quartile, with only 5% failing to beat the median. Conversely 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.

Preqin analysed its database of over 5,300 PE funds, identifying 2,500 buyout and venture capital funds with enough maturity to form part of the analysis. Preqin analysed the quartile position of funds during their fourth year, and then viewed the quartile rankings of these 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.

“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," says Tim Friedman, Senior Manager and author of the report. "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.

"In order to help fund managers see how they compare to their peers and to assist investors and advisors in making informed investment decisions, Preqin now provides full complimentary access to its Benchmarks product for all industry professionals.”

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