Patterns of performance
Getting to the heart of a private equity firm’s risk-return profile is a notoriously challenging exercise for limited partners when choosing which funds to back, especially given the asset class’s long-term investment horizons and therefore the need to analyse interim valuations on unrealised assets.
But what if there were at least partly predictive signals to help guide investor choices? Three recent research papers suggest there could be – if LPs watch out for certain patterns.
Limited partners have always had to dissect general partners’ reported performances when making fund investment selections, but the task has been made more challenging as the industry has matured and become more complex. And in today’s environment of slower exit rates, LPs are having to rely more on interim portfolio company valuations than in the past.
Yet three academic papers offer LPs a helping hand in getting to grips with what is going on in PE portfolios. One takes a look at how subscription lines of credit, deployment pacing and capital recycling can affect interim fund performance measures, another highlights how the history of reported valuations can predict future returns, and a third showcases how loss ratios may not be the metric for fund risk that many LPs assume them to be.
We discuss the findings of these papers with the authors and three seasoned LPs.
Chaired by Amy Carroll
Meet the panel
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Gregory Brown
The University of North Carolina at Chapel Hill Institute for Private Capital and Kenan-Flagler Business School. Gregory Brown is the Weatherspoon distinguished professor of finance at the UNC. Kenan-Flagler Business School and the founder and research director at the Institute for Private Capital.
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Steven Kaplan
The University of Chicago Booth School of Business. Steven Kaplan is the Neubauer family distinguished service professor of entrepreneurship and finance at The University of Chicago Booth School of Business and Kessenich EP faculty director at the Polsky Center for Entrepreneurship and Innovation.
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Michael Barzyk
Allstate Investments Michael Barzyk is managing director and global head of PE at Allstate Investments. He previously spent nine years at Pritzker Group Private Capital and was a senior associate with CIVC Partners.
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Jessica Sellam
Rothschild & Co Jessica Sellam is the head of the private markets group created within Rothschild & Co’s wealth and asset management division in 2023. She joined the wealth management division in 2006.
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John Haggerty
Meketa Investment Group John Haggerty is managing principal and director of private market investments at Meketa Investment Group. He chairs the firm’s private markets policy and research committees.
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If levered returns are reported in benchmarks, it is not surprising that GPs are becoming more aggressive users of sub lines to position themselves in the best light.
Michael Barzyk
Unpacking Private Equity Performance by Gregory Brown and William Volckmann (both The University of North Carolina at Chapel Hill Institute for Pri...