Mega Funds Vs. Targeted Vehicles — Evening Brief – 09.09.24
New research from data provider PitchBook has refuted the notion that multibillion-dollar private equity “mega funds” are generally incapable of replicating the performance of smaller, more targeted vehicles.
Mega funds are inherently favored by large Limited Partners (LPs), who eagerly seize the opportunity to allocate substantial investments to single vehicles being promoted by companies with extensive operational history.
The persistent trend of LPs committing to fewer, larger funds over the last decade or so has sparked significant debate over their capacity to generate competitive returns, given their need to deploy ever higher sums of capital into fewer viable deals of sufficient size.
However, a recent analyst note from PitchBook has revealed that the assertion that smaller funds with strategic niches tend to outperform mega funds over the long term is not consistent with the data.
Pitchbook examined quarterly returns for both European mega funds and non-mega funds from the first quarter of 2012 to the fourth quarter of 2023. The results were adjusted to reflect the compounded returns over the entire 12-year period.
Mega funds returned 177.1% versus 166.3% for non-mega funds, a 10.8% outperformance over a 12-year period. On an annualized basis, these equate to returns of 8.86% for mega funds and 8.50% for non-mega funds.
When analyzing annualized Internal Rate of Returns (IRRs) starting with five-year returns, mega funds consistently perform better than non-mega funds. Furthermore, the magnitude of this outperformance for mega funds increases as the time horizon increases.
European mega funds beat non-mega funds by 130 basis points over a 15-year period ending in 2023, with mega fund IRRs of 12.7% annually compared to 11.4% annually for non-mega funds.
PitchBook said the trend is consistent with the European as well as the global datasets. ”Our performance data shows some outperformance for European mega funds when looking at long-dated horizon IRRs (130 basis points annually over 15 years), marginal outperformance with quarterly returns (86 basis points annually over 12 years), and no meaningful outperformance with TVPIs.”
“It does, however, debunk the myth that mega funds underperform non-mega funds, the report noted. “The sheer size of mega funds will also make it more complicated for GPs [General Partners] to have significant ‘skin in the game’ and align GP and LP interest.”