A new study examining how institutional and individual investors select venture capital funds finds that individuals place less weight on prior performance than institutions. The authors estimate that this difference in fund selection could meaningfully reduce individual investors’ expected returns and suggest that expanded access to private market funds should be paired with education about the importance of track records in fund selection.
While track records matter, investors and their advisors should not rely too heavily on past returns or overlook the factors more likely to drive future performance. Although researchers have found persistence in venture capital and buyout returns, more recent research suggests that this persistence has weakened over time.
Determining which managers can generate above-average returns requires looking beyond past performance. Prior returns may reflect uniquely favorable market conditions, one outsized winner, a key investment professional who has since left the firm, or a prior fund that was much smaller than the manager’s new vehicle.
A more complete evaluation goes beyond metrics such as IRR, TVPI, and DPI. It examines four questions:
- Strategy: Does the manager have a well-thought-out strategy for creating value based on where its industry and sectors are headed?
- Sourcing: Does the manager have a sourcing advantage that helps it originate attractive investments that fit its strategy?
- Team: Is the investment team responsible for prior results still in place, and is there clear attribution of those results to the team?
- Process: Does the manager have repeatable processes for due diligence, operational improvements, and exits?
A manager’s track record should be only one part of an investor’s analysis. The important question isn’t simply how well a manager performed, but why. Investors need to determine whether the team, strategy, sourcing advantages, and processes are likely to produce strong results in the next fund.
Steve was formerly the Chief Investment Officer and Head of Private Markets at Manulife Investment Management. In this role, he was responsible for leading global investment teams across a wide range of asset classes, including private equity and credit, real estate, infrastructure, timber, and agriculture. Steve has served as a director of many public and private companies during his career, including two of Manulife’s U.S. SEC-registered investment advisors.
Important Notice: Private Markets Navigator does not provide investment advice, and the information should not be construed as such. Investing in private asset funds is risky, with potential for total loss and long-term liquidity restrictions. Read our full dislaimer.