Preqin released new data this morning showing that the PE universe’s worst-performing funds over the one-year, three-year and five-year horizons are mega-LBO funds ($4.5b+). Not too surprising, and is in line with past studies showing that the best percentage returns come from smaller funds (true of venture, too).
It’s worth noting that percentages are only one return metric that LPs must consider. The other is cash-on-cash returns. Would you rather have a 25% ROI on a $100 million commitment to a $5 billion fund, or a 50% ROI on a $10 million commitment to a $150 million fund? The obvious answer is the former, unless you were able to replicate the latter ten times over. At the same time, however, the same logic applies to cash-on-cash losses.
In the end, however, the only number that will really matter is the amount of fund capital that mega-fund wannabes are able to raise. If KKR hits the $10 billion mark with its new vehicle — coming soon to a public pension board meeting near you — then mega-fund death has been greatly exaggerated. Ditto for if Blackstone can finally break into double-digits, after spending nearly a year stuck under $9 billion.
Institutional investors keep telling me — and told Preqin — that they will be very hesitant to invest in mega-funds this year, but it sounds a bit more like New Year’s resolutions than actual commitment. Given that mega-funds had the best quarter-over-quarter performance improvement between Q2 and Q3, I could see alternative asset managers finding excuses to again walk with giants…