Odds of choosing a winning PE fund ‘worse than flipping a coin’

Picking a GP at random now gives investors a less than a 50% chance at beating public markets, according to data from PitchBook.

Only the top 25 percent of private equity funds launched since 2006 have outperformed public markets, according to new research.

PitchBook’s Benchmark Q4 2017 compared private equity fund performance against a public index, with Kaplan-Schoar public market equivalent scores (KS-PME) above 1x indicating outperformance relative to the S&P 500.

The median PE fund with a 2006 to 2015-vintage failed to produce a KS-PME higher than 1x, the research found. The potential for outsized returns has also fallen, with the top 10 percent of funds failing to exceed 1.5x relative to the public markets since 2005.

“Whereas an investor in PE two decades ago could essentially pick a GP at random and have a better than 75 percent chance of ‘beating the market,’ for vintages since 2006 those odds are worse than a coin flip,” the report noted. “Not only are fewer managers beating the market, but their level of outperformance has shrunk too.”