Buyout funds and venture capital managers have consistent performance across successive funds, but predicting future performance based on a prior track record is more complicated, according to a report from alternative money manager Pantheon Group.
The report, which uses Preqin fund data as of December 2018, tracks buyout and venture capital commingled funds of vintage years from 1985 to 2012, and the likelihood of persistence of performance across successive funds.
The report shows a summary of average quartile rankings assigned by Preqin, with a score between 1 and 4, with 2.5 as an average, with scores above that mark representing top of second quartile performance, and below that, third or fourth quartile performance.
For example, the average quartile for a first fund among U.S. buyouts is 2.38, while the second, third and fourth funds average 2.53, 2.38 and 2.52, respectively. Among European buyout funds in the same period, the average quartile for sequence numbers 1 through 4 are 2.38, 2.36, 2.39 and 2.54, respectively.
Among U.S. venture capital funds, the average quartile for sequences 1 through 4 are 2.53, 2.51, 2.71 and 2.33, respectively, while the average quartile for sequences 1 through 4 for European venture capital funds are 2.54, 2.44, 2.57 and 2.53, respectively.
While that persistence of returns across successive funds is critical for investors to consider, Andrea Carnelli-Dompe, head of research at Pantheon Group, in a news release announcing the report, says it doesn't reveal the complete story.
"Investors should be cautious about relying on persistence for three principal reasons: First, persistence may depend on where the manager is in its life cycle; second, a GP's recent funds are likely to be too immature to show lock-in performance, while the quartiles of previous funds still depend on unrealized values and unfunded commitments and may change by the time the funds are fully realized; the third, even if the due diligence appears to give a green light, the investment opportunity may not be actionable by the manager," Ms. Carnelli-Dompe said.
The report is available on Pantheon Group's website.