The Persistence of PE Performance
Greg Brown, Raymond Chan, Wendy Hu, Kelly Meldrum, Tobias True
Private equity (PE) investments have become an increasingly important allocation in institutional portfolios. How- ever, investing in private equity requires considering several factors not relevant to investments in public equity. Perhaps the biggest difference is that a commitment in a private equity fund is not an investment in existing (e.g., publicly traded) securities with a manager whose track record is easily observed. In fact, because investors almost never have information on what companies they will be investing in, they are putting faith in an organization, a fund’s stated investment strategy, and even specific individuals.
This faith is based on an assessment of ability to find good opportunities over a fairly long investment period. Consequently, the reputation of fund managers becomes vitally important, and it is common practice for investors to evaluate the track records of previous funds by the same firm (or investment team) as one of the measures of expected performance. In this article we summarize the existing evidence on how useful previous track records and risk profiles are in predicting the ultimate perform- ance and risk profile of a new fund. We also provide some new empirical analysis that furthers our understanding of performance persistence. In short, we confirm evidence indicating that performance and risk profile are per- sistent from one fund to the next.