Sourcing Outsized Returns

Interquartile Range of IRR Across Funds

This week we’re focusing on interquartile range of funds’ IRR that are bucketed into three implementation strategies across private equity.??

The lowest interquartile range in returns is in secondary funds, highlighting its potential for relatively lower risk implied by lower dispersion in returns. More diversification and robust investment selection in co-investment funds are particularly important to be prudent about and are implied by the highest interquartile range vs. primaries or secondaries.??

It is important to note that this is not considering the top and bottom deciles of the dispersion. Although the interquartile range for co-investment funds is higher, the top decile could also be higher, implying both higher expected return and risk. Co-investments also typically show a longer tail on the right of their return distribution, emphasizing the potential for strong, outsized returns if investors have capable sourcing, investment selection and risk management skills.

Catch up on Chart of the Week.

Definitions

Co/Direct Investment Funds: Any PM fund that primarily invests in deals alongside another financial sponsor that is leading the deal.?

Secondary FoF: A fund that purchases existing stakes in private equity funds on the secondary market.??