Performance Of Sector-Specific vs. Generalist Buyout Funds

This month’s Private Equity Spotlight investigates the varying performance of sector-specific buyout funds and buyout funds that maintain a diversified approach to investments, covering:

Returns offered by the private equity asset class are often a hot topic for discussion in the investment industry. With yields varying between fund types, sectors and managers, Jessica Duong investigates the differences in performance of sector-specific buyout funds and buyout funds that are diversified in their investment approach.

One of the main attractions of private equity for investors is the potential for outperformance over public equities over the longer term and the prospect of high yields. Offering insight into the sentiment of the LP community, Preqin’s latest global study of LPs revealed that 37% of investors surveyed indicated that a GP’s past performance is the most important factor assessed when looking to partner with a new private equity fund manager (Fig. 1).

We can use Preqin’s Performance Analyst database to compare the horizon IRRs of public indices, private equity and, more specifically, buyout and venture capital, as shown in Fig. 2. Over the 10-year period to June 2014, buyout and private equity as a whole outperform all listed indices shown by a significant margin, with buyout posting annualized returns of 21%, compared to 7% for the S&P 500.

Fundraising data shows that the majority of buyout funds through the years have been diversified in investment focus, both in terms of the number of funds raised and the aggregate capital secured. Yet for many investors, a manager’s ability to demonstrate deep expertise in a focused field is a key differentiator, with the belief that a deep knowledge of specific industries will lead to more wellinformed investment decisions. Is there a difference between the performance of funds that are diversified and those that specifically target investments in one sector? This article will explore this question, using the latest data on buyout fund performance from Preqin’s Performance Analyst online service.