Michael Bell, CEO of Meketa Capital, joined Keith Black, Managing Director of RIA Channel, to discuss the drivers of return dispersion across private equity managers.
Private equity can be an important part of an investor’s portfolio, with the potential to increase returns, enhance diversification, and expand investment opportunities. Bell notes the extreme dispersion in private equity returns, with top quartile managers earning annualized returns 14 percentage points higher than bottom quartile managers over the last ten years. For comparison, return dispersion is closer to 5 percentage points in public equity. This dispersion in returns makes it imperative to perform strong manager due diligence and to build a diversified portfolio of private equity managers.
Factors driving performance dispersion across private equity managers include the skill and experience of the managers, their investment selection process, and the ability to add value to the operations of the portfolio companies. Other factors include pricing discipline, exit timing, superior deal sourcing, access to propriety deals, and the industry concentration of each fund, especially when managed by general partners with deep expertise in that industry.
Individuals allocating to private equity may choose to invest in a single manager in a traditional drawdown fund structure. Doing so would require a high minimum investment and lock the investor into a fund with an expected life of ten years or longer. Investing through a tender offer or interval fund structure may allow the investor access to private equity with a lower minimum investment and potential options for enhanced liquidity. Investing in a single private equity fund brings the risk that the single manager or their strategy may experience substantial underperformance. Investing in a multi-manager fund structure allows an investor to access a private equity portfolio diversified across managers, geographies, industries, and investment types. By diversifying across these factors, a multi-manager fund is less likely to experience extremely positive or negative performance. Investors also benefit from low minimum investment sizes and access to managers they might not be able to invest in independently.
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