Key Points
- The internal rate of return (IRR) is a unreliable method for calculating performance due to potential manipulation and fabrication by fund managers.
- Predictability is a major concern in private equity (PE) performance, with evidence suggesting a lack of persistence and uniqueness in investment methodologies.
- Studies indicate low persistence in PE performance, challenging the notion of talent and skill as reliable predictors of success.
Fund managers have emphasized their investment methodologies, but the reality of value-enhancing techniques has been inconsistent.
Myth II: Performance Is Predictable
Despite claims of well-honed investment methodologies, evidence suggests a lack of predictability in private equity performance. The sector’s cyclical nature and low persistence in performance undermine the reliability of PE fund managers’ abilities to deliver predictable results.
Lack of Persistence in Performance
Studies show that persistence in private equity performance has been declining, challenging the idea of talent and skill as reliable indicators of success.
Persistence in Underperformance
Research indicates that certain private equity funds consistently underperformed from one vintage to the next, highlighting the lack of persistence in outperformance among leading PE groups.
Three Reasons for the Lack of Persistence
Factors such as over-intermediation, mature credit markets, and a commoditized private equity landscape contribute to the lack of persistence in performance. The absence of diversity in the profiles of PE practitioners may also hinder adaptability and skill in different market conditions.
Some may argue that the lack of persistence in PE performance suggests market efficiency, but it could also be attributed to poor risk/return management techniques among PE executives.
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Previous Post : Review of Financial Markets and Institutions
Author : Editorial Staff
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