A new report from PitchBook has found a high level of performance persistence across active private equity (PE) and venture capital (VC) managers, strong performance persistence between funds, with the level of persistence rising as a firm raises additional funds.
In aggregate, funds that deliver top-quartile performance are followed by a top-quartile successor fund 39 per cent and 34 per cent of the time for PE and VC, respectively.
The report, which is based on fund performance data from Q3 2017, is designed to help limited partners (LPs) and general partners (GPs) better understand private market fund performance relative to broader asset classes and other PE and VC strategies. Since last quarter, PitchBook has added more than 140 private capital funds to the Benchmarks data set, which now includes nearly 4,000 private market funds.
“Both PE and VC funds show a clear performance persistence within fund families, especially towards the ends of the return distribution,” says James Gelfer, senior analyst at PitchBook. “Our data also shows that the level outperformance persistence rises as a GP raises additional funds; however, we found similar findings in underperformance, indicating that LPs are granting too much flexibility to subpar GPs. Although there are caveats, our data seems to suggest LPs would be well-advised to consider past performance when evaluating future commitments.”
According to the report, the top-quartile persistence from the first to second funds is 38 per cent and 26 per cent for PE and VC, respectively.
Performance persistence increases from second to third fund in a fund family, with 43 per cent of top-quartile PE funds followed up by another top-quartile fund. Similarly, 55 per cent of top-quartile VC funds are followed up by another top-quartile fund.
Persistence underperformance also exists for bottom-quartile funds. When the second fund in a fund family falls into the bottom quartile, the GPs’ third fund will also be bottom quartile 34 per cent of the time for PE and 44 per cent of the time for VC.
Changes in net IRRs didn’t show a strong correlation with performance persistence.