Net IRR Dispersion from Benchmark by Fund Type

by Bronwyn Williams

  • 05 Nov 2010
  • 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 can be considered to be. The wider the IRRs are distributed, the more risky the strategy can be considered to be. Venture capital and early stage funds are the most risky strategies, with net IRRs widely distributed around the benchmarks. Approximately 5% of all early stage and venture capital funds have performed extremely well, beating their median benchmarks by more than 50%. The net IRRs of buyout and real estate funds are also dispersed relatively widely around their benchmarks, though fewer funds outperform them by a very wide margin. Fund of funds returns are clustered around their respective benchmarks, confirming that they are typically a lower-risk investment. With 70% of mezzanine funds posting IRRs within +/-5% of their median benchmarks, mezzanine offers a low risk profile to investors.

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