New research indicates that the performance of buyout funds largely comes down to the individual portfolio managers making the deals, not the overall private equity firm.
The preliminary working paper, which analyzed the performance persistence of buyout firms and individual portfolio managers, found evidence that individuals were “about four times as important as the organization” in explaining buyout fund returns over time. The paper was authored by Reiner Braun and Nils Dorau of the Technical University of Munich alongside University of Oxford professor Tim Jenkinson and Daniel Urban from Erasmus University Rotterdam.
“In absence of alternatives, many buyout fund investors put an emphasis on individual manager’s track record when making investment calls,” the authors wrote. “Our research indicates they may be right in doing so.”
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The four researchers looked at the performance of nearly 4,000 individual portfolio managers from about 800 different private equity firms between 1970 and 2017. They found that an individual manager who was previously responsible for a top-tercile deal was “substantially” more likely to land another top-tercile deal than to deliver performance in the middle or bottom third of buyouts. Managers whose previous deals were middle- or bottom-tercile were similarly likely to continue in the same performance bracket.
According to the study, these individual differences in skill were not tied to age or industry experience, whether managers attended an Ivy League university, or if they have obtained an MBA degree.
The individual managers also continued to display performance persistence after the authors controlled for where they worked. In fact, they found that performance persistence had declined at the firm-level over the last several years, while continuing to exist at the individual level.
“Even in the face of increased competition for deals and standardization of processes and terms, some individuals seem to exhibit repeatable investment skill,” the authors wrote.