The factors behind private-market managers' 'sticky' performance

Firms that perform well are likely to do so again — unless they lose a key ingredient to their success

The factors behind private-market managers' 'sticky' performance

Past performance does not guarantee future returns, as any ETF and mutual-fund investor who has read through the product literature knows. But when it comes to private markets, history can be a useful guide.

“Private equity and venture capital managers that do well with one fund are more likely to do well with their next,” reported the Wall Street Journal. Citing a new study from private-market research firm PitchBook, it said that 39% of funds that follow a top-quartile-ranking fund from a private-equity group end up becoming top-quartile themselves; that’s significantly better than the expected random outcome of 25%.

“Performance is even stickier at the other end of the spectrum,” the Journal noted.

But one question is whether the improved chances of success boil down to individuals’ deal-making talent or something at the firm level. Because of their reputation with bankers and other advisors involved in deal-making, successful managers tend to get the first look at upcoming deals; if it works out well, that feeds their reputation, resulting in a virtuous cycle.

Still, the same winning investment can contribute to the success of several funds; buyout groups and venture-capital firms frequently raise new funds, and some companies they buy end up being shared between more than one fund. To suss out this type of occurrence, some academics have conducted studies on a deal-by-deal basis; one expert, professor Oliver Gottschalg from French business school HEC, dove deeper by looking at which partner in a firm ran each deal.

“The upshot: Individual partners are an even better guide to which funds will do well, in terms of history so far at least,” the article said. “[P]erformance could suffer when key deal makers leave, though there isn’t yet enough data to get a solid handle on this risk.”

The risk may be elevated, but it isn’t absolute. One firm noted by the Journal, Apax Partners, is on its third set of leaders, though the rankings for its different families of funds have remained consistent throughout.