Predicting GP-LP relationships: Top 20 PE funds for OP&F
February 18, 2015
Public pensions are constantly being mandated to invest their money in various ways, including in the private equity and venture capital markets, which we track here at PitchBook. With an expansive set of data on limited partners and general partners in the space, we looked at some mandated pensions and generated recommendations for them from our open funds list. Ohio Police and Fire Pension (OP&F) recently announced plans to invest $350 million in private equity during 2015. Coupled with an AUM of $14.6 billion, it was a prime candidate.
We decided to take a content-based approach to the recommendation, using some of OP&F’s attributes and the attributes of the GPs and funds that it has worked with in the past. By viewing these characteristics over OP&F’s entire portfolio, we were able to get a good representation of its current experience and comfort level with different types of investments and investors. Then we compared these with attributes at the GP and fund level for funds that are currently on the market. Using a vector-based similarity metric, we pulled the top 20 recommended open buyout or growth funds for OP&F. Click here or on the image below to view.
Along with the similarity score, we pulled four extra metrics to rank the recommended funds (you can also explore these metrics at PitchBook’s data viz site here). The first (Avg. IRR) is an average IRR of past funds. We averaged performance of past buyout & growth funds for an investor where the close date was between 2004 and 2010. This was under the assumption that funds older than five years have emerged out of the J-curve, and using 2004 as a cutoff point in order to avoid running into vintage year problems.
The second (Successful Exit Ratio) is a ratio of successfully exited PE investments compared to overall PE investments made between 2001 and 2010. The Exit $ Ratio is the sum of round amounts where the investor exited divided by the sum of round amounts where the GP invested over the same period of time. These proxy metrics were developed to quantify what percentage of a GP’s portfolio is successfully exiting and at what level these exits are happening, compared to the dollars invested.
The last score we developed (PE Exit Participation) is a percent of all private equity exit round amounts where an investor participated compared to the total of all PE exits over the past decade. This is to show what percent of all PE exit rounds have seen participation from this investor. In short, it is a proxy for the involvement of the investor.
None of these measures have a statistically significant correlation to returns, but we are working to create more measures that are predictive of returns. We are also working furiously to put together other ways to rank investors, including custom network centrality measures. Click around and let us know what is interesting. If there are other things you would like to see, contact us at email@example.com or firstname.lastname@example.org.
Featured image courtesy of Wikimedia Commons user JamesQueue.