Four Ways to Finesse Your Way into the Top Quartile

Last week, I was doing some research in preparation for a panel at our Buyouts Texas conference on the ever-exciting topic of private equity benchmarking.

Surprisingly, it was an eye-opening experience. I say this because I had been under the impression that only one in four firms could justifiably claim a slot in the top quartile for fund performance.

Turns out, this view was hopelessly naïve. Because there are several reputable sources for raw data, and a panoply of options for slicing and dicing said data, it’s quite possible for the same fund to achieve a mediocre ranking by one metric and a more appealing one by another.

Now, I’m not talking Extreme Makeover-type improvements. Those at the bottom 10% aren’t going soar to the top 1 percent. But by focusing on the most flattering metric –- be it public market comparables, sector-specific rankings, or a particular time period within the fund lifecycle –- it is possible for more than 50% of funds to make an arguable claim to be “top quartile,” according to one panelist’s recollection of a study on that question several years ago.

So what’s the best way to give your LPs the impression that you’re knocking the cover off the ball? The following slideshow presents a few ideas, some of which may help to explain why it seems like more than one in four managers I speak to can proudly claim a spot in the coveted top quartile.

(Photo by Andy Dean Photography/Shutterstock)


[slide title=”Pick Your Best Vintage Years”]

Who says top quartile has to refer to the entire lifecycle of the fund? If you had a great three-year-run where you outperformed your peers by a big margin, focus on that. Granted, the strategy won’t work if your portfolio fell apart two years after posting triple-digit returns. But if valuations are holding up reasonably (albeit not markedly superior to your peers), why not focus on the period when your rivals were eating your dust?

(Photo by Subbotina Anna/Shutterstock)

[slide title=”Divide Your Portfolio into Sectors and Spotlight the Top Performers”]
Semiconductors may have been a bad bet, but those enterprise software investments certainly did well. What to do? Section off your portfolio to highlight your top-quartile performance in your most successful sector.  If your investors are really down on semiconductors, and you agree with their concerns, tell them you’re transitioning out of that area and the focus going forward will be on high-growth areas like enterprise cloud services.

(Photo by Anteromite/Shutterstock)

[slide title=”Gussy Up Your Exits by Focusing on Multiple of Cash Flow”]
Sure, everyone knows those still-private companies gathering dust in your portfolio are worth a tidy sum on paper. But in the end, it’s absolute returns that LPs value most.

So, when cash flows in, make sure everyone knows. This is particularly pertinent because it’s quite common for a fund, at some point in its lifecycle, to have a spate of exits that occur close together.  When this happens, put the word out. Focus on the return multiple for your best deals. Or, to sound even more impressive, for fast-growing companies with low revenues, use a multiple of cash flow. A return of 1.5x doesn’t sound that impressive, but selling for “50 times cash flow” has a nice ring.

(Photo by Karen Roach/Shutterstock)

[slide title=”Find the Most Flattering Data Set for Comparables”]
Shop for comps that put your fund in the best light. There are several different companies that provide data that can be used for benchmarking performance, including Thomson Reuters (publisher of peHUB), Cambridge Associates, Prequin and others. And, for more mature sectors, don’t forget public market comparables. Even if your fund didn’t do better than most of its peers, it’s possible that it still outperformed public markets.

(Photo by Tatiana Popova/Shutterstock)