Much of the research on private equity performance has relied on fund-level data provided by LPs. A new research paper was published this year based on deal-level data gathered by Burgiss.
The performance of the underlying portfolio company investments drives the performance of PE funds. Portfolio company holdings data, therefore, are crucial to understand what forces drive performance and how funds are structured. For instance, past studies using fund-level data find that PE performance, both for buyout and VC investments, has been highly cyclical: periods of high fundraising have been followed by periods of low performance at the fund level. Deal-level data provide a more powerful lens on the issue since a fund’s return reflects investments made at different times during the fund’s life, and potentially in different economic environments. Deal-level data can also shed light on what type of investments create value as well as agency and signaling issues that may arise over the life of a fund. For example, investments are sometimes “warehoused” even before fund raising is completed, potentially as a quality signal for the fund. In addition, as a fund’s investment phase draws to a close, the fund’s general partners may experience pressure to make investments in order to call capital commitments and/or to strengthen the case for launching a follow-on fund.
The paper’s preliminary findings confirmed much of what is known by investors in the asset class.
Key Findings: Portfolio company investment performance is highly variable and positively skewed, especially in VC, and consistent with the diversified fund model for private equity investing.
Such highly dispersed outcomes mean that overall performance in private equity is dependent on the success of a relatively limited number of investments, especially in VC funds.
Key Findings: Large investments appear to have lower performance for buyout but not for venture capital.
Key Findings: Average performance appears to drop off for exits past 4 years for buyouts, but not for VC.
Key Findings: Performance is lower for investments made (holdings) in years when the supply of capital to the sector is high. This effect is particularly pronounced in VC, consistent with fund-level research. Moreover, supply conditions in the investment year appear more important than those for the vintage year of the fund making the investment. Finally, buyout exits during high supply conditions (and hence competition in pricing) are associated with higher performance but this pattern does not hold in VC.
Venture capital defines high risk/high reward.
Post by Marcelino Pantoja