04/01/2004
“Manager selection is crucial,” says Derek Sasveld, director and strategy analyst, asset allocation and risk management at UBS Global Asset Management. “In total, about three-quarters of private equity funds perform below asset weighted peer group averages—that gives you an indication of the importance of getting the right manager.”
Alice Todhunter, head of investor and public relations at Schroder Ventures International Investment Trust in London, adds, “The difference between the top and the bottom quartile in private equity is as much as 30 percent—far greater than in the public equity market, for example.”
Thorough due diligence of prospective private equity managers is crucial: You need to analyze performance over five to 10 years: How have the returns been generated, is it a handful of deals? How important has market timing been? How stable is the team? Can the manager perform over various economic cycles?
Thane Stenner, a wealth advisor, warns that we should be mindful of chasing the latest star managers, since their recent wins have made money for existing shareholders, not us. We should also be very mindful of funds’ claims about performance. “It’s not that uncommon for a private equity manager to have generated a significant track record over the last three to five years, but with a small amount of capital.” The larger amount of capital managed, the more challenging it is going to be to repeat the performance, observes Stenner. “Warren Buffet of Berkshire Hathaway has opined many times about how it is virtually impossible for him to replicate [his] past performance because of their increased assets managed. Nimbleness does matter!”
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