Benchmarking Private Equity Fund Performance in the Mid-Market GP Universe with Insights on Social Stratification
DOI:
https://doi.org/10.57125/FS.2023.03.20.06Keywords:
private equity, social stratification, fund performance, management diversity, financial metrics, mid-market GP, quantitative analysis, investment strategiesAbstract
This work examines the impact of social stratification issues, particularly the diversity of the management team, on fund performance within the middle-market GP universe. It aims to harmonize traditional financial metrics with sociological aspects to provide a comprehensive explanation of what drives fund performance. Using a quantitative analysis approach, this research investigates the Burgiss dataset, which includes well-documented financial statements for over 3,000 private equity funds from 1990 to 2020. The study focuses on common performance metrics: Internal Rate of Return (IRR), Multiple on Invested Capital (MOIC), and Cash-on-Cash return. It measures the effects of fund size, vintage year, management fees, and management team diversity on these performance metrics. The findings indicate that larger funds are generally associated with higher IRR, MOIC, and Cash-on-Cash returns. Notably, diversity indices of the management team within these funds are positively related to IRR (β = 0.50, p < 0.001) and MOIC (β = 0.45, p < 0.001), two of the most important performance metrics. While some funds initially had low I returns, many showed recovery in the longer term. The results underscore the significant role social factors play in the performance of private equity funds. This study sheds light on the broader discussion of the relationship between social science, economic performance, and social structures. It illustrates the positive effect of management diversity on fund performance, which could motivate a reconsideration of investment strategies from a sociological standpoint, making them more sustainable and inclusive.
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