Private Capital Findings, Issue 21

Using a novel dataset of 5,925 portfolio companies across 467 funds managed by 315 PE firms, across multiple sectors and geographies, Portfolio Management in Private Equity by Gregory Brown and Celine Yue Fei (both The University of North Carolina at Chapel Hill) and David T. Robinson (Duke University, Fuqua School of Business) explores the importance of individual deal selection relative to portfolio construction.

The research finds that PE firms typically deploy the most capital in their lowest-returning investments. In other words, they take their biggest bets on their safest ideas, rather than their best ideas. It also finds that the earliest deals in a fund are slightly riskier, but that later ones tend to be much lower returning if they follow early successes.

Further, the research determines that at the fund level, returns can be attributed roughly equally to skill and luck. At the individual deal level, however, outcomes are much more variable and luck can play an outsized role in the success – or failure – of an individual deal. Taken together, these findings suggest that portfolio construction skill is vital to sustained success.