Look for This Quality in Private Equity Managers Who Outperform During a Crisis

Firms with diverse ownership have beat median returns for most vintage years — including funds raised just before the last recession.

Illustration by II

Illustration by II

Research shows that female- and minority-owned private equity firms consistently outperform — even during a financial crisis.

A new study from the National Association of Investment Companies found that companies with diverse ownership beat the median return across 78.6 percent of vintage years. This includes the vintage year 2007, a class of funds that would have started putting money to work around the time of the 2008 financial crisis.

According to the NAIC, women- and minority-owned firms raised in 2007 reported a net internal rate of return of just over 20 percent annualized — twice the median IRR for that vintage year among all funds tracked by the Burgiss Group, a private capital data firm.

Funds raised by diverse firms in the immediate aftermath of the crisis also outperformed: Women- and minority-owned funds reported an annualized net IRR just shy of 30 percent for vintage year 2009, compared to the Burgiss median IRR of about 20 percent.

This outperformance was not limited to IRR: Funds with vintage years 2007 and 2009 also beat the median on their multiples of total value to paid-in capital and their ratios of distributions to paid-in capital.

“This often-overlooked segment of private equity has a strong, proven history of surpassing the industry benchmarks,” NAIC president and CEO Robert Green said in a statement.

[II Deep Dive: Want 20 Percent Higher Returns? Do This.]

The study did not include the vintage year 2008, as no NAIC member firms reported raising funds during that period. Overall, the sample was comprised of 14 vintage years between 2000 and 2018, excluding periods when it lacked performance data for women- and minority-owned firms.

The lack of data for all vintage years may be attributable to the fact that diverse-owned firms only manage 1.3 percent of the investment industry’s $69 trillion in assets under management, and those included in the study managed $73.4 billion total. By contrast, Preqin reported that the private equity industry as whole reached $4 trillion in assets under management in 2019.

“We hope that studies such as this will continue to shine a spotlight on the talent in the diverse investment manager marketplace and that institutional investors will take measurable steps to enhance allocations to these firms,” Green said.