Click here for printer friendly page

In the absence of reliable data, how are investors supposed to evaluate performance?

From John McCrory, chief executive, Westport Private Equity: Private equity has made great strides over the last five years in terms of performance data. Figures compiled by venture capital associations and other organisations have increased the industry's transparency, but there is still a long way to go.

However, investors need to understand that the past performance of a team is not an accurate indication of how well their new funds will do in the future. Some of the very best performers in the 1980s, for example, were not the ‘stars of the 1990s - and vice-versa. Many of those who did quite well in the 1990s will struggle in the more difficult investment environment of the early years of the new millennium. Private equity is about much more than simple numbers.

Rather than focusing excessively on track record, investors should be looking at a number of other factors as well, including:
1. How good are the people managing the fund? Do they have the right experience? Can they really build value in their portfolio companies and have they done so?
2. Is the manager's stated strategy consistent with the investments it actually makes? Is the strategy fashion-driven?
3. How does the manager source its deals? Does it have access to good quality, unique deal flow? Is there too much emphasis on ‘doing the deal' rather than making investors money from it?
4. Are the managers able to demonstrate a consistent and long track record of buying prudently, building value and selling well - in difficult as well as favourable economic cycles?
5. Can you build a good relationship with the managers? You are going to have to live with them for at least ten years, and hopefully much longer - longer than many marriages, sadly, and divorce is considerably more difficult.

Treat due diligence and manager selection like a courtship. The old adage ‘wed in haste, repent at leisure' applies. Get to know your (general) partner intimately before taking the plunge. ‘Cooking lasts longer than looks.'

Westport Private Equity is a leading private equity fund of funds manager and specialist adviser with over E2bn under management in funds of funds and segregated advisory relationships. Westport's team of professionals concentrates on selecting top quality European and US private equity managers for its funds of funds and bespoke client portfolios.

Copyright © 2001 Westport Private Equity