Is there an identifiable point in time after which, irrespective of the historic performance of a private equity fund, it is logical for an investor to sell?
Pantheon set out to explore this question through a quantitative study: we wanted to understand whether there are inflexion points in the life of a private equity fund where expected value creation and distributions may become negligible relative to the total value already generated.
Whilst our results indicate that some investor portfolios may simply run out of steam by year eight, we also established significant dispersion within our dataset. Our results indicated that the investor in our median portfolio should have considered exiting funds once they reached nine years in age, but we also found that 25% of the funds in our dataset had yet to deliver a significant amount of value, while a different 25% subset of funds were actually losing value from around year six onwards.
Estimating or anticipating which funds are likely to retain significant upside is at the core of what experienced secondary investors seek to understand. We believe our findings are likely to be relevant considerations for any long-term private equity investor:
The clear conclusion from this is that there can be no substitute for detailed fund knowledge when making portfolio management decisions.
- Seeking to maximize the total return potential from a private equity allocation
- Pursuing an active portfolio management strategy
- Looking for benchmarks when considering purchases of mature secondaries
- Determining options for the management of so-called “zombie” funds
Our study further identifies two important considerations for sellers of mature portfolios:
- The size of gain foregone by selling early
- The implied IRR foregone by selling early
We believe the second consideration is likely to be more relevant for most investors, since the expected IRR can be compared to other investment opportunities available at that particular point in time.
Pantheon’s dedicated research and investment teams examined data for around 700 global private equity funds with vintage years ranging from 1983 to 2004 where at least 10-years of performance data was available. Fund stages and strategies included in our study were early and late-stage venture, growth capital, buyout, mezzanine, turnaround, special situations, distressed debt and balanced.
Co-author, Nik Morandi, Partner and Global Head of Portfolio Strategy and Research at Pantheon, is available to discuss the study’s findings.
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Notes To Editors
Pantheon is a leading global private equity fund investor that invests on behalf of over 400 institutional investors, including public and private pension plans, insurance companies, endowments and foundations. Founded over 30 years ago, Pantheon has developed an established reputation in primary and secondary private asset solutions across all stages and geographies. Our investment solutions include customised separate account programmes, regional primary fund programmes, secondaries, co-investment and infrastructure programmes.
As at June 30, 2014, Pantheon had over $32.2 billion assets under management* and we currently have 197 employees, including 72 investment professionals, located across offices in London, San Francisco, New York, Hong Kong, Seoul and Bogotá.Earlier this month, Pantheon was ranked first among the largest and most influential investors in Europe by Dow Jones’ Private Equity News. Pantheon took first place among Europe’s top 25 private equity investors in this annual compilation. The compilation takes into consideration feedback from some of the private equity industry’s most well-respected chief executives, placement agents and investor relations executives as well as data from Preqin.
In September 2014, Pantheon was ranked first among the largest and most influential investors in Europe by Dow Jones’ Private Equity News. Pantheon took first place among Europe’s top 25 private equity investors in this annual compilation. The compilation takes into consideration feedback from some of the private equity industry’s most well-respected chief executives, placement agents and investor relations executives as well as data from Preqin.
* This figure includes assets subject to discretionary or non-discretionary management, advice or those limited to a reporting function.
This press release is not an offer of securities for sale in the United States. Securities may not be offered or sold in the United States absent registration or an exemption from registration.
For more information, please visit www.pantheon.com.
Amanda McCrystal, Head of Global Marketing and Communications
Tel: +44 207 484 6200