By and large, the macroeconomic environment remains the most significant factor when assessing long-term private equity fund performance. Given the impact of the financial crisis, it makes sense that no matter the size of the fund, at the longest time horizon—10 years—internal rates of return have by and large converged.
Following the typical J-curve of fund performance, most assets that end up contributing to the majority of a fund’s return have already been sold, so a plateau is to be expected. The shorter term is where the greatest disparities lie, mainly owing to liquidation timelines and operational resources.
Larger funds, those exceeding $1 billion in size, can often purchase a company from a fellow PE sponsor that has already made considerable improvements to the extent of its abilities and resources; the larger firm then brings its greater arsenal of either industry specialization or operational resources to bear. This, in turn, can end up in a shorter holding period and relatively swifter exit, given the potential extent of advance work (so to speak) the prior PE backer has accomplished.
For funds sized $500 million or below, comparably lower IRRs at the one- and three-year horizons are explained by the longer holding periods needed to tune up various business functions and the potential for exit. It’s a consequence that is oft-implied but worth noting, as scaling up a firm to a sellable size also takes time, whether the intended buyer be a strategic acquirer or a fellow PE fund.