Net IRR Dispersion from Benchmark by Fund Type – April 2014

by Emma Underwood

  • 10 Apr 2014
  • PE

The dispersion of fund returns against the median performance benchmark is a useful indicator of the risk associated with each fund strategy. The more clustered the returns are around the median performance, the less risky the strategy is considered to be; while the wider the IRRs are distributed, the more risky the strategy. 

Venture capital and early stage funds are the most risky categories, with net IRRs widely distributed around the benchmarks.  Of all the venture capital and early stage funds listed on Preqin’s Performance Analyst that have outperformed their benchmarks, 76% outperformed the benchmark IRR by a margin of more than 50%. 

The net IRRs of buyout funds are also dispersed relatively widely around their benchmarks, although fewer funds outperform them by a very wide margin. Of the 633 buyout funds on Performance Analyst outperforming their median benchmark, only 24% do so by a margin of more than 50%. 

Distressed private equity returns are fairly clustered around the benchmarks with only 13.4% of all funds outperforming the median by a margin of 10% or more, 75% outperforming or underperforming by +/-10% and 11% underperforming by more than -10%. 

Fund of funds returns are also closely clustered around their respective benchmarks, with 86% of funds posting IRRs within +/-10% of their median benchmarks, confirming that they are typically a lower-risk investment. 

However, it is mezzanine funds that offer the lowest risk profile to investors, with 70% posting returns within +/-5% of their median benchmark returns.

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