Private equity funds that called a greater percentage of capital than other funds in the same vintage year did not outperform their peers, a new study by private equity funds-of-funds firm Pantheon shows.
Contrary to popular belief, calling capital quickly compared to other funds raised in the same year, “doesn't say anything about final outcome,” said Nik Morandi, partner and head of research and portfolio strategy at Pantheon. Mr. Morandi is the author of the Pantheon study, titled “Private Equity Cash Flows and Performance Patterns.”
Calling capital quickly did not result in a higher probability that the fund would produce top-quartile returns over the life of the fund. The result was the same when performance was measured by internal rate of return and by total value to paid-in return.
However, there is a relationship between distributions and returns, the study found. Private equity funds that distributed more than funds in the same vintage year during the typical five-year commitment period were more likely to produce top-quartile returns over the long term. For this analysis, performance was measured in multiples since the results would be skewed when measured by IRR because funds with distributions will have better IRR, Mr. Morandi said.
Private equity funds whose distributions were within the top 25% of funds in the same vintage year in terms of distributions outperformed their peer groups.
What's more, the deeper a fund's J-curve — indicating a fund's negative cash position, the lower probability the fund would generate a top-quartile return.
Pantheon's study was based on data for 322 U.S. buyout funds raised between 1992 and 2007, using fund performance data through the second quarter of 2013.