For private market investors, by far the most important consideration when evaluating managers is track record.
This is according to a recent poll of institutional investors conducted by placement agent Eaton Partners. Nearly three-quarters of surveyed investors said they considered track record the most important — a view that has become more common in recent years, according to Peter Martenson and Jeff Eaton, partners at the firm, which is owned by Stifel Financial.
“Track record trumps all,” Martenson said during a Zoom meeting with press on Thursday.
By comparison, factors such as fees, terms, fund size, and environmental, social, and governance considerations were seen as less essential, with only two percent of respondents citing fees and terms as the most important consideration. Likewise, two percent believed fund size was most important. None of the respondents said that ESG mattered the most — something Martenson attributed to ESG considerations being more “defacto” among private market managers.
The remaining 25 percent of respondents said the most important factor was “something else.” While the survey results did not include a breakdown of what that “something else” might be, Eaton and Martenson suggested that most of those investors were likely referring to the quality of the investment team, an option that was not explicitly included in the survey, but which they said is widely viewed as important.
According to Martenson, investors have placed more importance on past performance as they have accepted the existence of performance persistence — the tendency of outperforming managers to continue outperforming.
Multiple studies have documented performance persistence in private equity, including a recent working paper from the National Bureau of Economic Research, which looked at buyout and venture capital funds launched between 1984 and 2014.
However, that same paper identified an important caveat: These findings of performance persistence are based on the final outcomes of buyout funds — and most follow-up funds are raised while their predecessors are still operating. When looking at previous performance during the time of fundraising, authors found “little or no evidence” or performance persistence.
“The conventional wisdom to invest in funds that are, at the time of fundraising, reporting top quartile returns does not hold for buyouts,” they wrote.
According to Martenson, limited partners are under pressure to allocate to top-performing managers because “all the stakeholders those investors have around them are focused in the end on track record and performance.”
“LPs want to make best-to-better decisions because it’s a job protection exercise,” he said.