A warning shot has been sounded for private-equity investors. Not only can they no longer expect the stellar returns they are used to from the asset class, but also the reliability of top performers is slipping.Also at Investment Magazine:
For investors in the US, the reliability of solid returns among top performers – known as persistence – has been one of the hallmarks of private equity, making it something to retain. But new research by academics at the Massachusetts Institute of Technology, in Boston, shows that persistence is no longer a reliable feature.
The new research, by Antoinette Schoar, chair of the finance department and the Michael M. Koerner (1949) Professor of Entrepreneurship at MIT Sloan School of Management, shows persistence of returns from private-equity funds has gone down in the last decade, undoing the seminal work she co-authored 15 years ago with the University of Chicago’s Steven Kaplan.
Schoar and Kaplan’s 2003 report, Private Equity Performance: returns, persistence and capital flows, found “returns persist strongly across funds raised by individual private-equity partnerships”. In contrast, Schoar’s new work shows that the variance in returns between the top and bottom quartile still exists, but the persistence at the top has decreased.
“Being in the top quartile is still as important as before, but because persistence is going down, you can’t rely on a top-quartile fund in 2000 [staying] top quartile,” she explained. “What this means for investors is your life is even more difficult.”
Some asset owners, such as the US$80 billion ($101.1 billion) Oregon State Treasury, which is the oldest private-equity investor in the US, are reacting to this by reducing their PE allocations.
Oregon, which first allocated to private-equity house KKR 37 years ago, is gradually reducing its PE portfolio from 25 per cent of total assets to 17.5 per cent. Chief investment officer John Skjervem said the fund can no longer expect what it once did from its private-equity portfolio, which has added US$9 billion above the public-equity equivalent since 1980....MUCH MORE
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