Over 80% of investors revealed that assessment of past performance is a key factor when conducting due diligence on private equity fund managers, notes Preqin’s recent survey.

In its “Private Equity Spotlight” newsletter for July 2014, Preqin highlights that there is indeed a correlation between the fund raising success of certain fund types and their risk-return profiles.

Decide private equity fund manager performance based on strategy

According to the Preqin report, an examination of the risk-return relationship of different private equity strategies, through the median and standard deviation of net IRRs can facilitate investors select fund types aligned to their own risk-return needs.

By analyzing over 7,000 funds, Preqin identified the risk-return profiles of the main private equity fund types. The following graph captures the performance of different fund strategies:

Risk-Return by fund strategy  Private Equity

As can be deduced from the above graph, mezzanine fund strategy offers the lowest standard deviation of net IRR, and hence lowest risk with 6.5%. However, early stage venture capital funds have the highest risk and standard deviation of 19.8%.

Interestingly, early stage posts the lowest returns of all fund types displayed, with a median net IRR of 3.9%. Moreover, thanks to the effect of diversification, funds of funds display a lower level of risk, with a standard deviation of 8.0%. By investing in a range of fund types and vintage years, fund of funds are able to spread and reduce the level of risk.

Analysis of horizon return

By analyzing quarterly cash flow information of nearly 2,600 individual private equity funds, Preqin offers the following snapshot of the performance of the industry over a set period of time:

 Private Equity Horizon return

As revealed by the above graph, over the longest timeframe of 10 years, buyout outperforms all other private equity strategies, with a 10-year return of 25.4% compared to 22.5% for distressed private equity, 14.1% for real estate and 9.1% for funds of funds.

Private equity fundraising success

The Preqin report also dwells into the fundraising success of private equity funds. The following graph compares fundraising of different fund types raised, by the proportion of target the vehicles within each strategy achieved.

 Private Equity Fundraising success

The above graph highlights that a larger proportion of funds of funds failed to garner 75% or more of their target than any other strategy, reflecting challenges that the fund of funds market has faced in recent past in attracting LP capital.

Focusing on the European venture capital market, the Preqin report also highlights that Q2 2014 witnessed a lower total number of deals than Q1 2014. This is set forth in the following graph:

VC deals in Europe  Private Equity

The Preqin report also tracks the private equity investors looking to commit to venture capital funds in the year ahead:

Breakdown by investor type