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Identifying Top Performing Private Equity Funds

by John Mather

  • 30 Aug 2012
  • PE

While private equity investments can offer long-term rewards to investors, there is a significant gap between the returns of the best and worst performing funds. As institutional investors look to construct their private equity portfolios around their requirements, the ability to identify, select and evaluate top performing funds and strategies is of paramount concern. With the private equity fundraising market today more crowded than ever (1,256 vehicles are seeking capital), the process of selecting funds can be challenging.

Although past performance is no guarantee of future success, there is evidence to suggest consistency in how fund managers perform through their various offerings. Thirty-six percent of fund managers with a top quartile fund go on to manage a top quartile successor fund, and 66% outperform the median benchmark. In addition, 36% of bottom quartile managers remain in that quartile with their next offering, while 65% underperform that benchmark. Preqin Investor Network holds performance data for all fund managers currently seeking capital. To help identify top performing funds, quartile rankings are assigned based on the performance of the fund within its peer group. Peer group comparison takes into account the vintage, strategy and regional focus of a vehicle and uses the multiple and IRR as key indicators of performance.

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