Private Equity Fund Selection

Selecting Private Equity Managers

Private equity fund selection is a critical determinant of returns. Unlike public markets where index investing is viable, private markets require active manager selection to access top-quartile returns.

The Importance of Manager Selection

Return Dispersion

Private equity exhibits significant return dispersion:

• Top-quartile vs. bottom-quartile spread often exceeds 20% IRR
• Persistence of returns varies by strategy
• Access to top managers is often constrained

Due Diligence Framework

Comprehensive evaluation should cover:

Track record analysis

Team assessment

Strategy evaluation

Terms and alignment

Operational due diligence

Track Record Analysis

Performance Metrics

• IRR: Time-weighted returns, can be gamed with timing
• MOIC/TVPI: Money multiples, less timing-dependent
• DPI: Realized returns, most conservative measure
• PME: Public market equivalent comparison

Attribution Analysis

Understanding sources of returns:

• Revenue growth vs. margin expansion
• Multiple expansion vs. operational improvement
• Leverage effects on returns
• Sector and geographic allocation

Team Assessment

Key Considerations

• Tenure and stability of investment team
• Succession planning and key person risk
• Track record attribution to current team
• Culture and decision-making process

Strategy Evaluation

Market Opportunity

• Addressable market size and growth
• Competitive dynamics and differentiation
• Entry point in market cycle
• Strategy capacity constraints

Terms and Alignment

Economic Terms

• Management fees and offsets
• Carried interest and hurdle rates
• Clawback provisions
• GP commitment level

Governance

• LP Advisory Committee composition
• Key person provisions
• Investment restrictions
• Reporting and transparency

Conclusion

Successful private equity investing requires rigorous manager selection across multiple dimensions. By systematically evaluating track records, teams, strategies, and terms, investors can improve their probability of accessing top-performing managers.