Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds
- Date Posted:
- Is Database:
- Database
Analysis of private equity fund performance reveals a divergence in persistence btw buyout & venture capital funds. @RobertHarris @TimJenkinson @StevenKaplan @RuedigerStucke, @nberpubs
Robert Harris, Tim Jenkinson, Steven Kaplan and Ruediger Stucke, "Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds," National Bureau Of Economic Research, https://www.nber.org/papers/w28109
He looks at previous fund performance at the time of fundraising and finds no evidence of persistence for buyouts, "...For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold...."Interestingly venture capital persistence remains strong, in fact firms above median are outperforming S&P. Perhaps profits in buyout funds are being competed away, but because of the scarcity of high quality investment opportunities top VC remain a comparative advantage/network effect.
Ed, Just an FYI we had looked at an earlier version of this Kaplan paper but it was recently revised.
Ed Comment:“…We use average returns to vc funds to show that returns to risk-taking are not so great…”
This factoid is notable, “…It is worth noting that VC funds in the 2nd quartile also have PMEs above 1.0, overall and for both pre-2001 and post-2000 vintages. This goes against the conventional wisdom that only the top quartile or top decile VC funds outperform public markets….”
Core findings, "...We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using cash-flow data sourced from Burgiss’s large sample of institutional investors. Previous research, studying largely pre-2000 data, finds strong persistence for both buyout and venture capital (VC) firms. Using ex post or most recent fund performance (as of June 2019), we confirm the previous findings on persistence overall as well as for pre-2001 and post-2000 funds. However, when we look at the information an investor would actually have - previous fund performance at the time of fundraising rather than final performance - we find little or no evidence of persistence for buyouts, both overall and post-2000. For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold. Using previous fund PME at fundraising, we find modest persistence, but it is driven by bottom, not top quartile performance. On the other hand, persistence for VC funds persists even when using information available at the time of fundraising. Therefore, the conventional wisdom of investors holds for VC...."
Some implication for investors in buyout funds, "...First, little buyout fund persistence combined with a continuation of above public market returns for buyout is consistent with at least two explanations. It is possible that the buyout business has changed, with operating engineering becoming increasingly important...Some general partners adjusted while others did not. Alternatively, it is possible that general partners learned from each other and that has led to the lack of persistence.Second, our persistence results in U.S. buyout funds casts doubt on the industry rule of thumb to invest only in funds that were previously in the top quartile. To the extent buyout investors use past performance, they should focus on previous fund PME, rather than previous fund quartile, and should avoid bottom quartile performers. Third, the lack of a performance-size relation suggests that buyout funds have been able to scale their performance as they have become larger. PMEs in the post-2000 period are not appreciably different from those in the earlier period despite larger fund sizes….”
Some implication for investors in VC funds, he actually finds that VC funds above median outperform S&P, "....Our results on VC funds have two implications. First, the persistence of persistence in VC suggests that the industry rule of thumb to invest with GPs that have previously performed well and to avoid those that have not remains consistent with our results. The stronger performance persistence for VC as compared to buyout suggests that GP skills and networks for successful VC investing are harder to replicate than is true in buyout. At the same time however, VC funds with previous performance in both the top and second quartiles outperform the S&P 500. This is not consistent with the view that only very few VC funds outperform. In fact, previous funds that are above median appear to do so...."