How academic research can measure and predict PE performance

NextWave Private Equity

Greg Brown, Executive Director at the Institute for Private Capital and Finance Professor at the University of North Carolina (UNC) Kenan-Flagler Business School, joins Winna Brown to discuss what the Institute’s academic research says about PE’s performance and the role private capital plays in the global economy.

To get in touch with Greg, email [e-mail]

The Institute for Private Capital (IPC) is a non-profit, multi-university research initiative that’s housed at the University of North Carolina (UNC). Its mission is to improve public understanding of private capital’s role in the global economy by providing unbiased and independent research, conducted by a network of academic affiliates, with support from private sector companies. There are more than 35 member institutions involved in IPC – EY is one such institution – and these institutional supporters play a critical role in ensuring IPC research solves specific, practical issues affecting the PE industry.

Two topics are consistently top of mind for PE investors: PE’s role in the investment portfolio and the specific factors that predict future returns. IPC research explores an array of additional topics, and some of their findings include the following:

• Portfolios with private fund investments have superior returns on a risk-adjusted basis.
• There is a “risk-return pecking order” in which PE produces better risk-adjusted outcomes.
• The performance of individual deal partners is a reliable indicator of future fund performance.
• There are distinct determinants of performance at various stages of a fund’s life cycle.
• PE makes meaningful and direct contributions to portfolio company operations.
• After PE enters a new market, there is a positive spillover to the broader economy in the form of an overall productivity increase.

Over the coming years, there are two major focus areas for research and discussion in the academic community regarding private equity:

1. To more deeply understand how private assets fit into the broader portfolio management process
2. To identify performance drivers at PE-backed portfolio companies and explore how this has changed over time