Large Funds Generate Better IRRs, PitchBook Study Says

In the war between large buyouts and middle market funds, it looks like the big boys are winning. At least in terms of IRRs.

That’s according to “Fund Returns Report 1Q 2012 Edition,” a study from PitchBook Data. Funds larger than $1 billion, especially those bigger than $5 billion, produced a 12-month median IRR of nearly 25% for the time period ending June 30, PitchBook says.

Middle market funds, those ranging from $250 million to $1 billion, had a one-year return of about 15%. Smaller funds, those in the $100 million to $250 million range, came in at about 10%, says PitchBook , which analyzed the returns of about 6,000 funds for the study.

The financial crisis of 2008 to 2009 caused returns for most funds to tank for a year or two (many funds went negative, PitchBook says). So we’re skipping those.

Five-year results reveal that larger funds produce higher returns, PitchBook says. Funds in the $1 billion to $5 billion range have returned 10.5% since 2006. Bigger funds, those $5 billion or more, returned 10.3%.

But middle market funds aren’t doing too badly. Pools ranging from $100 million to $1 billion produced median IRRs from 7% to 8.5%.

The worst? Funds under $100 million. Those pools are generating 5-year returns of about -4%, PitchBook says.

It’s unclear what this data means for large LPs, which are pulling their money out of mega funds and putting it into the middle market. “I do not think a bright investor could conclude anything about which funds to choose by just looking at IRRs, which is easily manipulated,” says one PE exec. “You have to look at the risk one took to achieve returns and the actual multiple of capital the funds earned.”

IRR is one of the key metrics that everyone looks at, says John Gabbert, PitchBook’s founder and CEO. Gabbert conceded that IRR can be “manipulated a bit and that’s why we track 50 different metrics.”.

He pointed to U.S. PE returns by quartile (page 5 of the PitchBook study). As an example, he cited the big difference between 2007 vintage buyout funds. Funds in the top quartile, with a 13% IRR, are expected to return 72% more capital back to LPs than funds with a median IRR of 7%. “It ultimately boils down to how much capital you are returning,” he says.