Performance Of Sector-Specific vs. Generalist Buyout Funds by Preqin

This month’s Private Equity Spotlight investigates the varying performance of sector-specific buyout funds and buyout funds that maintain a diversified approach to investments, covering:

  • Performance of sector-specific vs. generalist funds, including quartile breakdowns and median IRR analysis.
  • Variations in performance within individual industries.
  • The 10 largest sector-specific and diversified buyout funds in market.

Performance Of Sector-Specific vs. Generalist Buyout Funds

Returns offered by the private equity asset class are often a hot topic for discussion in the investment industry. With yields varying between fund types, sectors and managers, Jessica Duong investigates the differences in performance of sector-specific buyout funds and buyout funds that are diversified in their investment approach.

Buyout Funds

One of the main attractions of private equity for investors is the potential for outperformance over public equities over the longer term and the prospect of high yields. Offering insight into the sentiment of the LP community, Preqin’s latest global study of LPs revealed that 37% of investors surveyed indicated that a GP’s past performance is the most important factor assessed when looking to partner with a new private equity fund manager (Fig. 1).

We can use Preqin’s Performance Analyst database to compare the horizon IRRs of public indices, private equity and, more specifically, buyout and venture capital, as shown in Fig. 2. Over the 10-year period to June 2014, buyout and private equity as a whole outperform all listed indices shown by a significant margin, with buyout posting annualized returns of 21%, compared to 7% for the S&P 500.

Fundraising data shows that the majority of buyout funds through the years have been diversified in investment focus, both in terms of the number of funds raised and the aggregate capital secured. Yet for many investors, a manager’s ability to demonstrate deep expertise in a focused field is a key differentiator, with the belief that a deep knowledge of specific industries will lead to more wellinformed investment decisions. Is there a difference between the performance of funds that are diversified and those that specifically target investments in one sector? This article will explore this question, using the latest data on buyout fund performance from Preqin’s Performance Analyst online service.

Top-Quartile Performers

Using Preqin’s performance metrics for 1,690 buyout funds, with vintages ranging from 1982 to 2012, we can compare the performance of sector-specific and diversified funds (Fig. 3). What instantly stands out is the greater proportion of sector-specific funds that rank as top-quartile performers: 29% compared to 24% of diversified buyout funds. While no guarantee of future performance, this analysis shows that those fund managers that exclusively target one industry have historically been more likely to achieve top-quartile returns.

Variable Performance within Sectors

However, returns can also range quite significantly within individual industries. Fig. 4 illustrates the mixed fortunes of sector-specific funds, with some industries attaining excellent track records as significant proportions of funds become top performers and/or see only a small minority of funds falling into the bottom quartile. The most remarkable of the industries shown, in terms of relative levels of success, are the telecoms, media and communications (TMC), and information technology (IT) sectors. A third of vehicles exclusively focused on the TMC sector, and a similar proportion (32%) of solely IT-focused funds, qualify as top-quartile performers. Only 13% of buyout funds focused solely on investing in the IT industry became bottom-quartile funds – a significantly smaller proportion than that of all other sectors shown in Fig. 4, with the exception of buyout funds targeting business services.

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Top 10 Fund Managers

We compile league tables of the top 10 private equity fund managers by strategy to find out which managers have raised the most capital over the last decade and, crucially, which have the most available to invest.

Preqin’s Fund Manager Profi les online service currently holds information on over 8,800 active private equity fund managers covering a variety of different investment strategies. The tables below* provide a snapshot of the largest players for each fund type based on the value of funds raised from third-party investors over the past 10 years, as well as by the estimated amount of dry powder available for future investments.

buyout funds

buyout funds

Latest Trends and Statistics

  • The latest industry news looking at interim and final close data, large and mega buyout fundraising and buyout deal activity over the past month.
  • Analysis of the healthcare-focused fundraising arena.
  • A breakdown of Europe-based investors in private equity.
  • European venture capital deal activity in focus.
  • An examination of IT buyout deals from 2006 to date.
  • A breakdown of the current fund of funds landscape in Europe.