PEI 300: Performance matters – up to a point

Successful capital raising relies on a number of different elements, but one – performance – tends to trump the rest. According to private equity technology group Bison, the top 50 firms in our ranking have earned their place at the top table by generating superior returns.

Or to put it another way, investors have gravitated towards firms with superior performance: simple.

Our top 50 firms have generated, on average, an internal rate of return (IRR) of 14.9 percent since inception (net of fees), according to Bison’s data. For the wider PEI 300, the figure is a slightly more modest 13.3 percent. For the industry as a whole, meanwhile, the average net return is just 11.3 percent.

However, the flow of capital at the large end of the industry is more nuanced. One might expect that our top 10 firms, which between them have gathered a total of $285 billion of investor’s money over the last five years, would have the best collective returns of all, but this is not the case. The average since inception net IRR for a top 10 firm is 14.1 percent, marginally lower than the wider top 50.

Let’s be clear: it is not dramatically worse, but it is worse. Clearly the difference between a successful firm and a true industry giant is not investment performance, but something else.

There are, in fact, a number of differentiating factors, say investors. The largest firms tend to be the best equipped in terms of investor relations, compliance and have the widest variety of strategies and structures. For a large investor this can be “difficult to resist”, says Georges Sudarskis, an advisor who formerly designed and ran the global private equity portfolio at the Abu Dhabi Investment Authority.

“The sustainability factor, the scale effect, the reputational game, the consistency element are all very reassuring,” he says.

Or, as a US-based fund investor puts it: “Big investors like state pension funds need big, safe hands to deploy the large amounts of capital they must put out each year. They would be the first to tell you that they can’t possibly deploy all of it in the smaller, often better performing funds.”

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One European LP points to the fact that the ability to not lose money – as some firms demonstrated during the financial crisis – is also highly appealing to large investors. Bison data on distributions versus capital calls may provide a final clue as to what really counts when it comes to raising private equity capital in vast quantities.

In the third quarter of last year – the most recent data available – the top 10 handed back around three times more money to LPs than they drew down. The ratio was even more distribution-heavy the quarter before. At the same time, the rest of the PEI 300 were also handing back more money than they were drawing down, but not quite on the same scale.

Mike Roth, research principal at Bison, says there are many components that go into a successful fundraise: “One is good performance; another is making it easy for LPs to make investment decisions and having good instincts about when to distribute money back to investors.”

When it comes to raising money, performance is a must. The timing of your distributions, however, can make all the difference.

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