PitchBook News - Does style impact performance?

Also: SoftBank Vision Funds' public portfolios outperform the markets; New manager outperformance remains minimal in aggregate and sporadic in timing.
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The Research Pitch
September 11, 2021
We just updated the live version of our Private Equity Barometer, which features the 14 macroeconomic, credit and equity indicators that explain much of the variance in quarterly returns.

Check out the new data for Q3
Determining whether specialized funds outperform their more generalized peers
"Does style impact fund performance?"

It's a common question we've received after last year's launch of PitchBook Investor Style, a framework for quantifying private managers' investment style.

The question partly stems from a widespread viewpoint within the industry that specialization, particularly by sector, tends to give managers a performance edge.

In our new research this week, we examined PE buyout fund performance by sector style to determine if the data backs up this assertion.

We took two approaches:

First, we split the PE buyout fund universe (vintage years 1996 to 2015) into three-year vintage cohorts and three style groups: generalist, targeted, and specialist.

We then looked at the distribution of performance metrics—including public market equivalent (PME), distributions to paid-in capital (DPI), and IRR—for each of these groups over time.

The results were inconclusive: certain style groups outperformed in one vintage-year cohort and underperformed in others.

It's far more beneficial to allocate to top-quartile funds across the investment style spectrum than it is to indiscriminately allocate to specialists.

While breaking out aggregate statistics by vintage cohort provides a simple way to compare performance across styles, it doesn't succinctly answer the question of whether funds with different styles have significant differences in performance across the full sample.

A linear regression model was the second approach we took, which allows us to compare performance more directly across styles.

The regression analysis showed that while there is not a linear relationship between sector concentration and performance, funds that were classified into the targeted group had lower average PMEs and IRRs than generalist and specialist funds.

Although this underperformance was statistically significant, it's unlikely to compel investors to shy away from targeted funds on its own.

We also found no significant performance differences between generalists and specialists.

Click to dive deeper into our free research: US PE Fund Performance by Investment Style

Please feel free to reach out with any questions or feedback.

Andrew Akers, CFA
Quantitative Research Analyst
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What comes after Fund I?
Emerging manager funds—defined as funds I, II, or III—are picking up again in private equity, encouraged by a serene deployment and monetization environment and heightened institutional allocations to PE.

We've previously covered first-time funds and how seeding and anchoring can help; our latest report discusses what happens next.

While some LPs allocate to first-time funds to outperform with hungry, new managers, outperformance against mature funds remains minimal in aggregate and sporadic in timing, with greater variation in performance compared to subsequent funds.
Click for many more charts on emerging manager performance.

Second funds show reduced performance variance while third funds improve in both median IRR and TVPI. Third funds also periodically outperform first and second funds, as bottom performers are often unable to raise subsequent funds.

In fact, one-third of emerging managers are unsuccessful in raising their next fund at each stage of funds I, II, and III.

LPs that seek emerging managers with niche strategies for diversification purposes may fare even better, as our data shows that specialist emerging managers consistently outperformed other emerging managers in recent years.

Emerging managers should take note that the most important criterion for LPs to re-up with an emerging manager is persistent strategy execution.

With limited performance metrics to pore over during due diligence, a manager's ability to execute on a proposed deal pipeline, accurately underwrite deals, and implement early operational value-adds bodes well for future performance and fundraises.

Click to download our free report on the performance of US PE emerging managers: Beyond Fund I

Feel free to reach out with any questions or feedback, or if you would like to discuss the research.

Jinny Choi
Analyst, Private Equity
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Thematic Research
SoftBank Runs on IPOs
Vision Funds' public portfolios outperform the market

Exits are accelerating for SoftBank's Vision Funds.

The results for each portfolio company, however, have been mixed.

In our latest research into SoftBank's earnings and performance, we created an index of Vision Fund companies that have gone public on US exchanges.

So, how has the portfolio performed? Which companies are leading the way?

What can we expect going forward—Vision Fund 3?
read the free research
In the News
Lead VC analyst, Cameron Stanfill (right), on "Power Lunch."
Our insights and data featured in the press:
  • How regulations around SPACs are changing the game—and when an IPO or direct listing might be the better route to go public. [CNBC]

  • The single biggest barrier to electric vehicle adoption: charging infrastructure. [NYT]

  • Will this year mark a comeback for first-time venture funds? [WSJ]

  • Non-domestic investors participated in one-quarter of the venture deals in the Greater China region during H1. [Institutional Investor]
If you're a journalist interested in interviewing our analysts or requesting data, contact our PR team.
Deal Commentary
Senior EMEA analyst Nalin Patel weighs in on the recent IPO news involving UK-based biotechnology company Oxford Nanopore:

"Oxford Nanopore's decision to list on the London Stock Exchange, rather than the NASDAQ, indicates that recent LSE rule changes are enticing more sought-after tech listings to London.

"European biotech companies have often listed on US exchanges to raise awareness and tap into new investor pools.

"However, changes to regulations on the LSE appear to be working and include the option to utilize a dual-class share structure, which has proven popular for tech companies around the world in recent years."

Nalin Patel

Senior Analyst
Private Capital, EMEA
Webinars & Events
What went into our launch of Greater China coverage? (Links to the new report in the section below.)

What does the latest Chinese VC data show? And how will regulatory crackdowns impact the market?

Senior analyst Joshua Chao breaks it all down in the opening of our latest podcast episode: listen here
  • Sept. 14: Nizar Tarhuni, the head of our institutional research group, will join a webinar to discuss how PE and VC have been impacted by social, political, economic and environmental events. [BVCA members only]
Highlights from our other research content published this quarter:

Market updates Thematic research Emerging Technology Research (free previews) Coming next week (subject to change)
  • US PE Middle Market Report
  • ETR: Internet of Things (sneak peek)
  • ETR: Fintech
  • ETR: Cloudtech/DevOps
Thanks for reading! Feel free to email us any time with feedback, questions or tips!

Learn more about the PitchBook Institutional Research Group or access our full research libraries for clients and non-clients.

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