Bison Performance Workshop Recap

by Michael Roth

Bison hosted its first Performance Workshop in connection with Buyouts East here in Boston on March 25, 2015.  The goal of the workshop was to try to evaluate how private equity investment returns impact asset allocators and managers.  For those of you who did not have the opportunity to join, here is a summary of some of the topics and points covered.

Keynote Address – “Does Smart Money Really Exist?” 

Michael Nugent, cofounder and CEO of Bison, provided private equity performance and asset allocation insights using Bison’s dataset of cash flows covering over 1,200 funds. 

Analyzing the dataset, the majority of which had vintage years of 2000 or later, he noted that the mean and median PME alpha for the funds was slightly negative compared to the Russell 2000.

 Michael also presented on how three of the largest institutional investor groups, US public pensions, UK public pensions, and US foundations allocated money to these funds. The presentation also looked at the 25 foundations with the largest private equity portfolios as their own subset since they are considered among the most sophisticated LPs. The main takeaways from this sampling included:

  • Based on the % of funds with a PME alpha greater than 0 (outperformed the public markets): Top 25 US foundations (55%) were the smartest investors followed by Foundations (54%), US Public Pensions (51%), and UK Public Pensions (46%).
  • US public pensions are more likely to invest directly in buyout and venture funds while UK public pensions have invested a large portion of their PE allocation into fund of funds.

Performance Workshop – “What does adopting PME mean for the industry?”

Rasmus Goksor, cofounder and COO of Bison, moderated this workshop with industry experts: John Kim (Principal at Kelso), Jesse Reyes (Managing Director at J-Curve Advisors), and Hugh Wrigley (Managing Director at GEM).  It was an engaging discussion highlighting both shortcomings and strengths of peer benchmarks, PME analysis, and manager investment behavior.

Some highlights from the discussion:

  • Private equity still lacks the analytical tools and access to public market comps that would make quantitative analysis pervasive in the same way as it is for Hedge Funds.
  • To use PME for manager selection, the industry needs a PME benchmark for ranking one fund against another.
  • Criteria for what index to measure against when doing PME analysis needs to be developed.
  • Managers are unlikely to time market or become more selective about sectors as a result of PME growing in popularity.
  • Connecting a fund’s growth to sector growth may help uncover operational value add.

 Academic Research – “Private Equity Performance Persistence”

Professor Kyle Welch, George Washington University, was given unique access to Bison’s fund cash flow data for his research into private equity performance persistence.  Presenting his findings for the first time, he highlighted four points:

  1. Private equity needs a new metric for measuring operational value add beyond IRR and TVPI.
  2. Bison PME has a stronger correlation to a high IRR than the Cambridge Benchmark.
  3. A high IRR is not an indicator of future performance.
  4. A high IRR is also not an indicator for manager ability.

 Panel Discussion – “LP investment expectations for 2015” 

Michael Nugent hosted a discussion with three prominent limited partners, Amy L. Schondra, Vice President at Hirtle Callaghan, Diane Mulcahy, Direct of Private Equity at Ewing Marion Kauffman Foundation, and Jed Johnson, Investment Director at Crow Holdings Capital Partners.

  • All panelists noted that they are focused on lower middle market buyout funds, emphasizing that they like smaller funds where the GPs are highly motivated.
  • They expressed with concern the latest venture capital bubble, which is most apparent in late stage venture capital.