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| Wisdom & Fair Warning |
Picking Winners
04/01/2004
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“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!”  Back to main article: "Wisdom & Fair Warning"
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