In my last post I commented that getting "access" to the star funds in Australia is no longer easy. The $1.2 billion fund raised by Pacific Equity Partners was reputedly three times over-subscribed.
Access is enormously important in private equity investing. In public markets, investment returns are largely determined by asset allocation. What really matters is whether you put your money into stocks, bonds, property or cash-- not which stock you choose or which fund manager. In fact, over a decade, the spread between a top quartile bond fund's perfomance and a third quartile fund is only about 1%. For shares the spread in returns rises to about 3%.
But get this, depending on which piece of research you accept, the spread between top quartile and third quartile private equity performance sits somewhere between 15% and 22%. Massive.
Implication? If you can't get your money into a top-performing private equity fund you're better off staying out of the asset class. It's all about access.
Pretty interesting. Bill Burnham and Paul Kedrosky have been known to cover persistence in private equity returns. It seems that, in contrast with managed funds, private equity managers who outperform, can be expected to also outperform other managers (not necessarily the market) the year after. So access is important. Then again, on other days - the opposite seems to hold true, and people do challenge the persistence of returns in private equity.
The thing about private equity, and particularly Aussie venture capital, which really gets to me, is perceived lack of liquidity. I mean, is there a liquidity problem for Aussie private equity? I don't know! it sure seems like it. If they are concerned about the lack of big exits in US, it worries me how Australians deal with this this problem seeing that we don't have anything nearly the size of NASDAQ or the NYSE.
Posted by: Daniel Nerezov | March 07, 2006 at 01:50 PM