CBR Briefing #5

Does past performance predict the future in private equity?
A successful venture capital’s follow-on fund has a good chance of becoming a top performer. That is not so clear for top buyout funds.

A series of stacked column bar charts on a one hundred percent scale shows that managers who had run a top-quartile buyout fund previously did so again thirty-eight percent of the time over the years of 1984 to 2000, but only twenty-two percent of the time over 2001 to 2008. Among managers who had run a top-quartile venture-capital fund previously did so again forty-nine percent of the time over 1984 to 2000, and forty eight percent of the time over 2001 to 2008.s

Venture-capital managers who had previously run a top-quartile fund ran another top-quartile performer more than 48% of the time.

  • Conventional wisdom that advises investors to back private-equity managers with successful funds still holds for venture-capital funds, but less so for buyout funds, according to research by Chicago Booth’s Steve Kaplan, with Robert S. Harris of the University of Virginia, and Tim Jenkinson and Rudiger Stucke of the University of Oxford.
  • The researchers studied private-equity partnerships— both venture capital and buyouts—from 1984 to 2008.
  • Venture-capital managers who had previously run a top-quartile fund ran another top-quartile performer more than 48% of the time (see chart).
  • Buyout fund managers, however, did not consistently produce winners after 2000. Managers who had run a top-quartile fund subsequently ran another top-quartile performer 22% of the time—almost the same rate as those who ran bottom-quartile funds but whose later funds broke into the top quartile.
  • Returns on buyout funds, including those with previous funds in the bottom quartile, exceeded the S&P 500 both before and after 2000. As for venture funds, only those with previous funds in the top two quartiles outperformed the S&P 500.

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