Picking a Private Equity Manager Has Gotten Easier

The difference between the best and the worst managers has been declining since 2010, according to a new analysis from eFront.

Illustration by II

Illustration by II

Betting on the wrong private equity manager was always one of the biggest risks in the investment strategy. But the chances of picking a poor manager are going down.

Since 2010, the difference between the top and bottom 5 percent of leveraged buyout funds has decreased on average. The difference is at one of its lowest points over the last 10 years, according to the latest quarterly private equity performance report from eFront, the alternative investment software firm owned by BlackRock. The difference — 1.308X — is reported as the TVPI (total value to paid-in capital) multiple. TVPI measures the value created by the private equity fund.

The software firm attributed the decline in the risk of selecting a manager to a strong market where many private equity funds have been able to profitably exit investments and easily refinance debt.

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The eFront study also reported that private equity funds are taking less time to exit portfolio companies after buying them, resulting in declining time to liquidity.


The decline started in 2015 and reached its deepest point in 2018. Since 2018, the time to liquidity has stabilized at approximately 2.7 years, according to the quarterly report’s authors.

Dividend recapitalizations — when the company takes on debt to pay a special dividend to shareholders — are a big factor in reducing the time between purchasing a portfolio company and exiting it. With low rates, dividend recaps are easier than ever.

“Dividend recapitalizations might explain the stabilization of time to liquidity just above the threshold of 2.5 years needed by fund managers to apply their skills and create value in portfolio companies,” according to the report. The long-term average for time to liquidity is 3.12 years.

This faster turnover forces private equity firms to go back to investors for fresh money more often.

“This in turn fuels more frequent and larger fund raising, as the capital distributed to fund investors can then be recycled in the next generation of funds,” the authors wrote.