The oft-repeated private equity quip that “75 percent of funds claim to be in the top quartile” may indeed be true.
Of 500 firms surveyed by consulting firm Peracs, as many as 77 percent could place themselves within the coveted top-quartile performance category by manipulating key data inputs, co-founder Oliver Gottschalg said during a seminar in New York.
Gottschalg noted that by carefully selecting the right performance benchmark provider, some 66 percent of funds surveyed could claim top-quartile status.
In private equity, benchmark comparisons are typically derived from commercially available performance data provided by companies including Thomson Venture Economics and Cambridge Associates.
Being in the 'top quartile' somewhere, somehow is not a meaningful criterion.
Vintage year selection can also make a material difference. Although the majority of funds in the sample considered the year of the first close to be the vintage year, this was not an iron-clad rule. Gottschalg said a private equity firm could, hypothetically, define its fund’s vintage year as the year it began fundraising, which would possibly place it in an earlier and less competitive peer group. Alternatively, the GP could define its vintage year as the year of the final close one or several years later, to the same relative-performance-enhancing effect.
Adding vintage year manipulation to benchmark-provider selection allowed 77 percent of funds in the Peracs study to claim top-quartile status.
In a February note produced for the Buyout Research Program, Gottschalg wrote: “[T]he good news is that in general fund managers are not exaggerating their performance when they claim to be in the top quartile. The bad news is that the state of performance benchmarking in the PE industry is still imperfect and insufficient for investors to make accurate investment decisions that maximize the returns to their PE portfolio.”
At Peracs' recent seminar, Gottschalg argued that vintage year comparisons are inherently flawed as vintage year peer groups contain funds with large variations in size, experience, and investment strategy. Instead, Peracs recommends deal-level analysis evaluated, not by vintage year, but the date of individual deals.
“Being in the ‘top quartile’ somewhere, somehow is not a meaningful criterion to assess the quality of a GP,” said Gottschalg.