The boom in private equity-backed selling over the past few years, cresting in 2015, yielded rich returns for certain U.S. buyout funds. More than that, it proved a differentiating area for the top tier of U.S. fund managers.
As illustrated by the chart below, certain vintages far outpace others in the long run in terms of IRR, while the financial crisis helped tighten performance across the board. But since 2009, significant variance arises once more, with the top quintile of PE fund managers able to post considerably higher performance all the way through 2013 vintages.
U.S. PE buyout fund IRRs by vintage year and quintile
Of course, the J-curve effect comes into play for more recent vintages, although the extent to which the bottom quintile dips is illustrative of a current scarcity in quality targets. Given the roughly concurrent timing of the exit boom, it’s clear top U.S. buyout fund managers differentiated themselves quickly when the opportunity came, securing good deals as multiples grew more heated. Those buyers capitalized on the worldwide surge in M&A and secondary buyouts, even after a relatively brief holding period.
Their overall performance across all vintages, meanwhile, underlines the rationale for limited partners to maintain exposure to the asset class, recommitting to their most trusted fund managers that have been able to post consistently high performance. The question now is whether such outperformance can be maintained as the buyout cycle winds down. Given the broader investment market, it’s likely that LPs will continue pouring money into PE allocations, willing to accept lower rates of return than historical highs in exchange for relative stability and even a slim margin of outperformance.