15What does 25 years of private markets data say about dispersion of returns? How often do fund managers repeat in outperforming competitors? Is manager selection more than guesswork?
A new Moonfare study offers new insight into how small differences in annual performance compound into very large gaps in value over a typical 10-year fund life.
Chief Economist Mike O'Sullivan and Head of Private Equity Philip Meschke analysed PE vintages from 2000 to 2023. In an illustrative simulation of forward-compounding returns, they found that top-quartile funds returned roughly twice the capital of median funds over a 10-year hold.
Public markets don't produce gaps like this. Industry research shows that the interquartile gap between large-cap equity managers is mere 2.6 percentage points while in private equity it rises to 19.2.
The research draws on academic literature, industry research and empirical analysis of private equity and venture capital data by PitchBook.
Key takeaways from the report:
- The best and worst managers are worlds apart. The spread between top and bottom-quartile private market managers far exceeds anything seen in public markets. Industry studies find a 19.2% interquartile return gap in PE, versus just 2.9% in large-cap equities.
- The return gap compounds with every vintage. In long-duration assets, differences in annual performance compound. Our analysis suggests top-quartile funds can return roughly twice the capital of median funds over a ten-year hold.
- Manager selection is more than guesswork. Dispersion in private markets only matters if performance carries forward. Top-quartile funds remained top quartile 34% of the time, confirming performance is not purely random.
- The best funds are closed to most investors. Identifying top managers is only half the challenge. The best funds are structurally oversubscribed, meaning the ability to secure allocations is itself an advantage that analysis alone cannot provide.
“Understanding both the magnitude and persistence of dispersion, and then being able to select and access quality funds, is critical in constructing a private markets portfolio,” argues Mike O’Sullivan, report’s lead author.
To learn more, download the full report by filling in the form.
