Private Equity Returns – Past Performance is a Good Guide

Lately I have been getting really interesting data and research papers sent to me by friends and colleagues. Here is another one for all of you data junkies out there. I found this one on the Private Equity Spotlight website. The article on page 5 talks about how past performance can be an indicator of future performance when evaluating the performance of various private equity partnerships. The basic takeaway from the piece is that performance persists — top performers generally continue to be top performers in successor funds. This is not a surprising result, but it is interesting to note how strong the effect is — a top quartile fund has about a 75% chance of being a top or second quartile performer in a subsequent fund. A bottom quartile fund has about a 40% chance of moving into the top two quartiles. When it comes to private equity, past performance is a pretty decent predictor of future performance (at the quartile resolution, that is). This helps explain why some of the rich keep getting richer in this industry — it pays to squeeze your way into a proven performer even if the price and terms aren’t optimal.

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