Preqin’s Performance Analyst online service currently tracks performance data for almost 7,600 private equity funds, of which 300 are distressed private equity funds, which include distressed debt, special situations and turnaround vehicles. Using this data, Preqin can compare the performance of predecessor and successor funds to gauge consistency. Assessing how well a fund will perform is a continuing challenge for institutional investors and a strong track record is one of the most important factors that investors take into account when considering making new commitments to the private equity asset class.
Performance Analyst assigns quartile rankings to funds by looking at both the net IRR and net multiple. Using this data, the relationship between predecessor and successor fund performance quartiles can be determined.
As illustrated in the chart above, 46% of GPs who have previously raised a top-quartile distressed private equity fund went on to have their successor fund also ranked in the top quartile, in comparison to 36% of all private equity funds. Almost three-quarters (74%) of distressed private equity funds that have achieved above median performance went on to raise a top-quartile fund in the future, whereas only 21% of GPs pursuing a distressed private equity strategy did so with a third- or bottom-quartile predecessor fund.
This analysis reveals that there is an important relationship between the quartile rankings of predecessor and successor funds. For distressed private equity funds in particular, the performance of the predecessor vehicle is greatly indicative of the performance of the successor fund in terms of quartile ranking. A greater proportion of top-quartile distressed funds will go on to have a top-quartile successor; however, a lower proportion of distressed funds will achieve the same success if they follow third- or bottom-quartile predecessor funds in comparison to the statistics for the asset class as a whole.
Although it is important to note that past performance is no guarantee of future returns, there is a strong indication that if a fund manager has performed well previously, it will continue to perform well going forward, especially for distressed private equity managers. Consequently, institutional investors will look to use track record as a key factor in the fund manager selection process.