Selection Supersedes Access

6 Pages Posted: 17 Nov 2020

See all articles by Gitanjali Swamy

Gitanjali Swamy

PCRI, Harvard Business School; IoTask; University of California, Berkeley; Auto-ID Center, MIT

Bhavin Shah

affiliation not provided to SSRN

Nitin Nohria

affiliation not provided to SSRN

Daniel Bergstresser

affiliation not provided to SSRN

Irina Zeltser

affiliation not provided to SSRN

Date Written: 2009

Abstract

Private equity is one of the fastest growing yet most opaque industries today. From its inception in the early 50s to today, it’s been at the center of the some of the most powerful entrepreneurial and wealth creation stories. Not only has the industry created hundreds of millionaires in both investors and operators, but it has also launched, nurtured and revived some of today’s most successful businesses.

According to PEI, Thompson and other sources, the PE equity market has been growing rapidly and reached $2.5 Trillion in 2008. About 60% of the allocation or $1.5 Trillion is allocated to venture and buyout funds and the remainder is allocated to distressed, mezzanine and other funds. It is not just the sheer size of this market that is compelling but the growth rate is extraordinary as well. In a little over a decade from 1980 and 1994, the amount of private equity outstanding rose from less than $5 billion to $100 billion at CAGR of 23%. In the first quarter of 2008 alone, U.S. private equity firms raised $58.5 billion up nearly 32% over the $44.3 billion in the first quarter of 2007.

Buyout funds alone now control nearly$1 Trillion in capital not including leverage, and venture capital funds control another $350 Billion. Including the impact of leverage, they have an aggregate buying power of $3 Trillion; that’s enough to buy more than 40 McDonalds, 10 GEs, and 500 General Motors. What were 296 VC and 40 buyout firms in 1985 has evolved to 741 VC firms and 588 Buyout firms in 2007. Inspite of the industry growth, LPs are investing less and less in new firms.

From 2002 to 2006, while the total number of funds have grown by a CAGR of 7.85% and the AUM have grown by 43.9%, the number of new funds have only grown by 1.34% and new fund AUM has only grown by 35%. Most of the new growth comes from new buyout funds; in the venture industry the total venture AUM has grown at a CAGR of 30.7% as compared to new venture AUM at half that rate or 16.2%. In the same period, the number of new venture funds has shrunk at -2.6% as compared to the total number of venture funds that has grown at a CAGR of 3.58%.

The remaining private equity alternatives such as distressed and lending funds are emerging categories that show the same pattern of fragmentation. This fragmentation, coupled with the lack of transparency, makes it difficult for investors to assess and compare funds. It has created an environment where rumors run rife and facts are rarely consistent. While many such as Calpers, have tried and somewhat succeeded at making private equity fund performance more transparent and objective, they have not focused on debunking some of the myths surrounding funding behavior and investor selection.

Our aim has been to review and challenge the key myths that have historically guided and continue to guide investor selection behavior by analyzing the industry-wide and investor-specific performance data that has only recently become publicly available in the industry.

Keywords: Alternative Assets, Private Equity, Benchmarking, PME, Valuation

Suggested Citation

Swamy, Gitanjali and Shah, Bhavin and Nohria, Nitin and Bergstresser, Daniel and Zeltser, Irina, Selection Supersedes Access (2009). Available at SSRN: https://ssrn.com/abstract=3702081 or http://dx.doi.org/10.2139/ssrn.3702081

Gitanjali Swamy (Contact Author)

PCRI, Harvard Business School ( email )

114 Western Ave
Allston, MA 02134
United States

HOME PAGE: http://www.privatecapitalresearchinstitute.org/people.php

IoTask ( email )

One Broadway, 14th floor
Cambridge, MA 02142
United States
7819753345 (Phone)

HOME PAGE: http://www.iot-ask.com

University of California, Berkeley ( email )

310 Barrows Hall
Berkeley, CA 94720
United States

Auto-ID Center, MIT ( email )

Bhavin Shah

affiliation not provided to SSRN

Nitin Nohria

affiliation not provided to SSRN

Daniel Bergstresser

affiliation not provided to SSRN

Irina Zeltser

affiliation not provided to SSRN

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