Insights into Private Equity Careers and Venture Capital Careers

Every year, private equity data provider Pitchbook releases its accounting of the best global managers. This year’s 2023 report provides a fascinating review of the landscape. Here’s a review.

Methodology and Scoring

Overall, the 2023 PitchBook Global Manager Performance Score League Tables report provides a comprehensive evaluation of private capital fund strategies worldwide. The report ranks the historical performance of fund families managed by general partners (GPs), offering a more nuanced and robust measurement than traditional methods like internal rate of return (IRR) quartiles.

PitchBook’s proprietary methodology is central to the report’s rankings. The Performance Scores are calculated at the fund family level, reflecting the aggregate performance across multiple funds rather than a single fund. This approach is crucial because it allows the scores to encapsulate the overall strategy and team performance of a fund manager, providing potential limited partners (LPs) with a more holistic view of a GP’s track record.

The scoring system considers the dispersion of returns and the uncertainty associated with IRR figures, which are influenced by factors like fund age and the proportion of distributions already made to LPs. This method contrasts with the traditional quartile ranking system, which often oversimplifies performance comparisons by ignoring the variability and finality of returns.

Scores are standardized on a 0 to 100 scale, where 50 represents a neutral performance. The distribution of these scores across 2,182 fund families managed by 1,577 GPs shows that the top quartile begins at a score of 58.3, and the top decile starts at 66.2. This scoring allows for more precise comparisons across fund families with different vintage years and strategies, offering transparency and comparability that traditional benchmarks lack.

Global Rankings

The report ranks the top-performing fund families across various private capital strategies, including buyout, venture capital, real estate, and infrastructure. The following three offer a view of the Buyout, PE Growth, and Venture Capital areas. Interestingly, in the buyout category, DC Capital Partners Fund leads with a score of 88.2, followed by Atlantic Street Capital and Monomoy Capital Partners, both of which scored above 84. Overall, it is interesting to see how well the fund families perform.

Going Beyond Traditional Benchmarks

One of the report’s key insights is its critique of traditional benchmarking methods, particularly the reliance on IRR quartiles. The report argues that such methods lack the nuance necessary to accurately assess a manager’s performance, as they fail to account for the wide dispersion of returns within quartiles. For example, a top-quartile fund might have significantly different economic outcomes compared to another fund in the same quartile due to the variability in IRRs.

To address these limitations, PitchBook’s Performance Scores offer a more sophisticated alternative. By normalizing excess IRRs through a modified Z-score and weighting each fund’s contribution based on its age, realized distributions, and performance deviation, the scores provide a more accurate reflection of a fund family’s historical performance. This approach allows for objective comparisons between peer families, even when they have divergent fund vintages.

Limitations and Disclaimers

Despite its advantages, the report acknowledges several limitations. The most significant is that historical performance is not a reliable predictor of future results. Additionally, data availability may restrict the comprehensiveness of the scores, and changes in fund management or strategy over time could affect the relevance of past performance in predicting future outcomes. The report emphasizes that while the Performance Scores are a valuable tool for due diligence, they should be used alongside other metrics and qualitative evaluations.

Conclusion

The 2023 PitchBook Global Manager Performance Score League Tables offers a fascinating analysis of private capital fund performance. By moving beyond traditional benchmarking techniques, the report provides a more nuanced and comprehensive measure of fund family performance, making it a valuable resource for LPs engaged in manager selection. However, the report also cautions against relying solely on historical performance, underscoring the importance of a multifaceted approach to due diligence in private capital markets.

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Global M&A Activity Rebounds in Q2 2024

Every now and then we do a review of the global mergers and acquisitions picture (M&A). This is that reviewed based on a recent report out of private equity data provider Pitchbook. The second quarter of 2024 marked a significant turning point for the global M&A market. After a challenging period characterized by high interest rates and subdued activity, the market has shown signs of a robust recovery. This resurgence is evident across various sectors and regions, with notable improvements in deal value and count.

Mild Recovery in Global M&A

The global M&A market saw a notable increase in activity in the first half of 2024. Deal count and value have risen by 10% to 15% compared to 2023, signaling a mild recovery. This growth has been driven by corporate acquirers and strategic deals, with private equity (PE) activities also joining the uptrend in Q2. PE’s share of total M&A deal value rebounded to 41.0% in Q2 2024 from 33.5% in Q1, ending a nearly two-year decline. This rebound is partly attributed to better liquidity as banks re-enter the market, competing with nonbanks and resulting in lower borrowing costs despite stable central bank interest rates.

Regional Highlights: Europe and North America

Europe and North America have been key regions contributing to the recovery. European M&A activity bounced back with a 17.1% increase in deal value in Q2, following a dismal Q1. The Swiss National Bank and Sweden’s Riksbank cut interest rates, and the European Central Bank followed suit, which is expected to boost M&A activity by lowering the cost of debt. Notably, financial services in Europe experienced a 63.7% year-over-year increase in deal value, with significant transactions such as the $13.1 billion hostile takeover of Banco Sabadell by BBVA.

In North America, M&A activity advanced by approximately 13.0% year-over-year in the first half of 2024, with deal value expected to top $975 billion across nearly 9,000 deals. The top deals in Q2 included ConocoPhillips’ $22.5 billion acquisition of Marathon Oil and Johnson & Johnson’s $13.1 billion acquisition of Shockwave Medical. The energy and IT sectors were prominently represented in these transactions.

Sector Performance and Valuations

The valuation metrics for M&A transactions in North America and Europe remained stable in the first half of 2024. The median enterprise value (EV)/EBITDA multiple was unchanged at 9.5x, while EV/revenue multiples held steady at 1.6x. These multiples indicate a potential end to the valuation reset that began after the peak in 2021. Trading multiples in public markets, measured by the S&P 500, have risen, suggesting a possible bullwhip effect that could propel private company multiples higher.

Antitrust and Regulatory Challenges

Regulatory scrutiny has been a significant factor affecting M&A deals, particularly in the healthcare sector. The Illumina-GRAIL acquisition saga underscores the challenges posed by potential monopolies and increased regulatory oversight. Despite these challenges, healthcare M&A activity continues, driven by demographic trends and technological advancements. The sector remains attractive, with Big Pharma companies focusing on innovative biotech firms and promising clinical assets.

Outlook and Future Trends

Looking ahead, the M&A market is poised for continued recovery, supported by potential interest rate cuts and improved liquidity. Sectors such as financial services, materials and resources, and energy are expected to see increased deal activity as buyers take advantage of lower multiples. However, economic and geopolitical uncertainties, such as the US presidential election and ongoing conflicts, could impact the market. Nonetheless, the M&A landscape is adapting to a new normal, with a realistic mindset taking hold among buyers and sellers.

Conclusion

In conclusion, Q2 2024 has set the stage for a more robust and durable M&A recovery. As borrowing costs decline and economic conditions stabilize, the M&A market is likely to see sustained growth, with strategic and PE buyers driving deal activity across various sectors and regions.

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