How Does the Interim Performance of Private Equity Funds Compare with Their Ultimate Success?

by Claire McNeil

  • 12 Feb 2015
  • PE

With a typical fund life of around 10 to 12 years, the overall performance of a fund is only fully realized when it has liquidated. For an investor, the importance of reviewing a fund manager’s track record has been demonstrated, but how important is the interim performance of a fund in determining its ultimate success? The chart below demonstrates how a fund’s performance four years into its life compares with its performance at the 10-year mark. Preqin’s Performance Analyst calculates quartile rankings using an equal weighting of the most up-to-date fund IRR and multiple for pools of funds broken down by fund type, vintage and geographic focus.

The above chart demonstrates that top quartile funds after four years are most likely to retain a top quartile position at the 10-year mark; 64% of funds in the top quartile in their fourth year of life remain so in their tenth year. Twenty percent of such funds fall into the second quartile in the tenth year, with only 15% falling into the third or fourth quartiles.

The story is similar for funds ranked in the bottom quartile in their fourth investment year. Seventy percent of these funds remain in the fourth quartile in their tenth year, while only 30% of these funds breach the quartile bound. Twenty-one percent make it into the third quartile and only 9% reach the first or second quartile in their tenth year of life.

Therefore, fund quartile performance four year’s into a fund’s life provides a good proxy for its quartile after 10 years, demonstrating that interim performance can be a good indicator of the fund’s ultimate performance.

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