Best PE Firms?
I have an interview coming up for a PE FoF Associate position. What is the best way to get smart on some top PE firms in terms of performance so I can discuss in an interview? Which PE strategies are doing well these days?
Are there any PE shops that are known for having really solid partners and investment strategy that consistently beat their peers? I've been having tough time finding this information as PE performance is in fact private.
Please do not simply list firm names without any further info. Thank you.
For some reason, your question made me think of this.
Read the book "King of Capital", It is about Blackstone and the PE industry since the 80's. Highly recommended so you can have a better grasp of the history and of the people behind today's mega PE funds.
Check out the PEI 300 for a list of the top private equity firms. If you search wsj, ft and other newspapers you can find some articles related to performance.
On the CALPERS website you can find performance of the PE funds that they're invested in.
Also good to read the first half of this book because some of the top Fund managers discuss their own experiences...
http://www.amazon.com/Masters-Private-Equity-Venture-Capital/dp/0071624…
The large public ones have clear IRR tables in their Q's and K's; shouldn't be too hard to look up filings for BX, APO, OAK, FIG, KKR, OZM, CG.
Easy to know who the big names in PE are, but no one's going to expect you to know the specific performance details of any of these funds. If I were you, I'd try to differentiate myself by demonstrating an understanding of some of the structuring elements and concerns of LPs making investments in private equity funds. I'll give you some hot-button issues that are coming up in fundraising these days:
Deal-by-Deal Promotes: Fund sponsors have historically gotten away with being paid their "promoted interest," or carry, on a deal-by-deal basis rather than a fund-wide basis. LPs are increasingly demanding that all the deals be "cross-promoted." In other words, losses on one deal will offset the gains on others.
FMV: PE fund assets are illiquid and difficult to value, so fund sponsors get a lot of flexibility in reporting the fair market value of fund assets. Many LPs would argue that the marks reported by sponsors do not accurately reflect true value, and in the downturn, PE funds were arguably slow to discount their assets (which resulted in PE fund assets appearing to be overweighted in many LP portfolios).
Hurdle / Catch-up: PE funds often have a hurdle return to hit before the sponsor starts to earn a disproportionate share of the income. After they hit the hurdle, many sponsors have historically gotten to take a "catch-up" share of the profit (say 50%) until they hit their target percentage of the overall profit (say 20%), which makes up for the hurdle. LPs are pushing back on catch-ups.
Discretion: I know in real estate, a lot of sponsors are having trouble raising fully discretionary vehicles. In other words, LPs might agree that they want to invest with the sponsor, but are hesitant to put money into a commingled fund over which the sponsor has 100% discretion to buy and sell. Instead LPs are trying to soft-circle funds that a sponsor can ask for, and the LP wants the right to review each deal on a case-by-case basis. To me this seems inefficient, and I'm not sure LPs (pensions, FoFs, endowments, etc.) are properly equipped to be making these decisions.
"Stickiness": How sticky is performance? Is there much predictive power in track record? How much of that is based on the individuals versus the platform?
Sourcing / Value Creation: LPs should carefully diligence where a fund's performance comes from. Does the sponsor have a superior ability to source off-market or under-covered opportunities? Does the sponsor have the operational capabilities to change the outcome of an investment for the better?
Strategy Drift: LPs should be on the lookout for fund sponsors that have been very successful in their infancy, but have grown in recent years and/or have changed for other reasons. As a result, recent or prospective future investments may be off-strategy from the sponsor's true expertise.
Fees: Sponsors are generally paid a management fee based on AUM or invested capital. In addition, some sponsors charge acquisition, disposition, and/or financing fees. Some of these ancillary fees have the potential to create conflicts of interest.
This is a small subset of the major issues that LPs and sponsors negotiate during fundraising. Perhaps others can add.
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Thanks re-ib-ny, that's very insightful info. Much appreciated.
I actually would like to know which funds / sponsors have had better performance historically though, as that question did come up in a past interview. I pulled the list of top 50 PE firms here: http://www.peimedia.com/Pages.aspx?pageID=3391
But these are just the top firms in terms of fundraising, and says nothing about their performance. I know for example that Cerberus made some awful investments including Chrysler and GMAC and would guess that they are not among the top 20 firms in terms of performance.
I don't have any raw date - am curious to see these as well - but don't rule out Cerberus. They do a llot of distressed investing, so any given company in their portfolio is more likely to go belly up than that in another firm. They're a big fund that's very reputable on the street; wouldnt be surprised to see them in the 1st tier of returns
Not to bash on Cerberus, since many firms made bad investments in their last funds, but re: 09grad's point, I don't think I'd put Cerberus anywhere near the '1st tier of returns'. I agree that they have/had a fairly reputable name, but they've really struggled lately and are facing substantial fundraising issues - as are many other firms. Also, I think it's important to disambiguate between private equity returns and distressed credit returns. While Cerberus makes the news for their big private equity investments (Chrysler, Yellowbook), the vast majority of their money is made off their distressed credit business - which quite often buys the distressed debt of their private equity portfolio companies at an attractive price. You could probably say the same about Apollo but I think the difference is they haven't whiffed on as many of their private equity investments and, to my knowledge, are better with their credit/non-private equity investing activities.
I think generally people would be surprised at how poorly many of the 'marquee' names have performed in the past cycle (exempting guys like BX/KKR that, by virtue of their public status, are really now diversified asset managers with intentionally moderated returns). I suspect given the current/likely near-term fundraising environment, it will become a lot more clear which firms have performed and which haven't.
Here is the CalPER's link:
http://www.calpers.ca.gov/index.jsp?bc=/investments/assets/equities/aim…
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I love reading through sites such as CalPER's. It is amazing how people assume Big = Best, when the reality is that many of the large funds produce mediocre returns and some even lose money.
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