Preqin Investor Network’s Blog takes a closer look at the industry from the institutional investor’s perspective.
Examining the past performance track record of fund managers currently raising capital should undoubtedly play a significant role in investment professionals’ due diligence. Predecessor fund performance metrics are shown to provide a good indication of the potential performance of successor funds, with many managers that have raised high performing funds going on to raise successful subsequent funds.
Nevertheless, a private equity fund’s ultimate performance is only fully realized once it has liquidated, usually at least 10 to 12 years after it has launched. Fund managers instead often provide investors with interim performance data, from a fund’s fourth or sixth investment year, as this is usually the point at which fund managers bring new funds to market. How significant a role should this interim performance play in investors’ due diligence process?
With performance data on more than 6,800 vehicles, Preqin Investor Network takes a closer look at how successfully interim performance data can predict a fund’s overall performance.
Preqin Investor Network used performance quartile rankings assigned to funds in their fourth and sixth year of investment after their vintage year, and quartile rankings assigned in the tenth year of investment (representative of maturity), to examine whether interim performance figures can be used as a successful predictor of overall performance. Results successfully demonstrate a strong relationship across the period, with 64% of funds with a top quartile ranking in their fourth investment year going on to generate top quartile returns in year 10, and a similar pattern emerging across all quartile rankings.
Furthermore, quartile rankings in a fund’s sixth year of investment provide an even stronger indication of a fund’s ultimate performance, with 79% of top quartile ranking funds going on to generate top quartile returns overall.
Take a closer look at the reliability of performance track record as part of investors’ due diligence process, along with further insight from some of the world’s top service providers on key due diligence questions that must be asked, in Preqin Investor Network’s Key Due Diligence Considerations Report, available from 23 July.