Private Equity Return Factors

Six researchers from Germany wrote a research paper about the different factors that affect private equity fund returns.  The researchers were Philipp Aigner, Stefan Albrecht, Georg Beyschlag, Tim Friederich, Markus Kalepky and Rudi Zagst.  They analyzed 358 funds and found the following results:

• Fund manager performance persists from fund to fund.  For managers ranked in the top 25%, 41.7% returned to the top 25% in their follow-on fund.  For managers ranked in the second 25%, 50% moved up to the top 25% in their follow-on fund.
• Diversifying the region and sector of the fund does not affect returns
• Diversifying the financing stages of the investments positively affects returns i.e. the more diversified the fund is, the better the returns
• General partner/manager experience has a positive affect on returns
• Performance of publicly traded markets has a positive effect on returns i.e. higher returns in the public markets mean higher returns for the private equity fund.  But good performance of the markets during the vintage year affect the fund returns negatively.  The vintage year is when the fund is opened and receives investment capital.
• Interest rates have a negative effect on returns i.e. higher interest rates mean lower returns
• Gross domestic product growth has a positive effect on returns.  If the growth is during the vintage year of the fund, then it has a negative effect on returns.