This research also highlights the sector concentration that has taken place in PE over the years. To what extent has this affected performance?
Luke Riela: “We have seen a marked shift towards investing in technology, which will inevitably have had an impact on performance. Technology has been among the best-performing sectors over the past 10-15 years, and so a move in that direction has certainly helped PE returns. Conversely, a shift away from energy and consumer investment, which have been two of the weakest-performing sectors, has impacted overall returns positively as well.”
Josh Lerner: “If you look back several decades, traditional buyout groups would have greeted the prospect of a tech investment with a great deal of scepticism. There was a sense that without tangible assets, these companies were too risky. There is now a recognition, however, that even without hard assets to borrow against, customers are locked into their products, providing a source of stable, predictable cash flow. “Nonetheless, tech does tend to be pretty cyclical. There are boom and bust cycles. As a result, while there have been some very successful deals, there are also investments made during certain periods that firms have come to regret, so investors need to be cognisant of the cyclicality risk.”
Growth capital-backed businesses grow much more rapidly than their matched peers, but they do so at a cost, because they are also much more levered.
William Megginson, The University of Oklahoma, Price College of Business
