January 31, 2018
In the world of private markets investing, not all IRRs are created equal – we call those periodic table movers. That’s a pretty simple statement with a rather complex explanation. Similarly, this is a pretty simple visual of a rather complex analysis. Furthermore, digging beyond the surface reveals some interesting implications.
Periodic Table Movers - IRR
The left side of the chart shows the average IRR rank order. This illustrates expected returns for a variety of investment strategies. Perhaps unsurprisingly, multi-stage VC, U.S. SMID buyout and early stage VC are the top three performers. A bit more surprising, the fourth strategy on the list is U.S. large/mega buyout. Uniquely, this often gets passed over as being a lower returning strategy. What may be most shocking (although we’ve talked about it for a number of years now) is where ROW funds rank: 10 out of 13 categories!
Periodic Table Movers - DPI
Shifting our focus to the average DPI rank order on the right-hand side, the world starts to feel right again. Yes, it makes sense that, despite where they stack in the IRR ranking, distressed debt and real estate top the PI list. Not to mention, they both have a potential for yield and, in the case of distressed debt, shorter hold periods in times of volatility. One notable anomaly is mezzanine funds, ranking beneath U.S. SMID. This matches the data we’re seeing through our fund diligence. As more mezzanine groups take equity positions, thereby extending the duration of their fund realization cycle. On the flip side, we’ve also witnessed a long period of debt availability for buyout investors. This allows for dividend recaps; we think this is partly responsible for SMID’s ranking, as well as other buyout-oriented categories.
Both IRR and DPI are important factors to consider in portfolio construction and investing. Just be sure to consider them in a greater context, and understand that they are periodic table movers, to get the complete picture.