Diverse and Minority Private Equity Firms Outperform General Industry

Diverse and Minority Private Equity Firms Outperform General Industry

Diverse and minority-owned private equity firms have produced higher investment returns over a sustained period benchmarked against the general private equity industry, according to a new report issued by the National Association of Investment Companies.

The new report “Recognizing the Results”, is a performance survey report commissioned by the National Association of Investment Companies (NAIC), the industry association representing diverse and minority-owned private equity firms. Minorities own 78.6% of NAIC firms and 69.2% of NAIC firms have investment operations with at least 50% women or minority investment professionals. The NAIC is based in Washington, DC (www.naicpe.com)

“Recognizing the Results” compared the audited financial returns of NAIC firms against the broader private equity market across four industry benchmarks for the period 1998 – 2011:

  • NAIC firms outperformed the upper quartile of the PE industry in realizing investment returns (NAIC firms 20.9% vs. 11.8% for all U.S. PE and 14.7% for buyout subset);
  • On a median and capital-weighted basis, NAIC firms’ internal rate of return performance was superior to the upper quartile of the PE market and buyout subset;
  • NAIC firms significantly outperformed the PE industry returning capital to investors (NAIC firms 160% vs. 67.1% for all U.S. PE and 89.1% for buyout subset);
  • In 7 of 10 years, NAIC firms realized returns in the PE industry’s top quartile.

“As principal fiduciary of Connecticut’s $25 billion pension fund, I am pleased to see that NAIC’s study of minority private equity managers clearly demonstrates the outperformance that NAIC firms have generated over their peers, and the benefits of diversification for pension funds and their beneficiaries,” said Denise Nappier, Connecticut State Treasurer.

An analysis of the findings indicates a set of common factors contributing to NAIC Firms’ comparatively superior performance:

  • Disciplined adherence to investment strategies
  • Better terms and unique investments sourced through proprietary networks
  • Emphasis on applying operational improvements in portfolio companies
  • Investments tied to rapidly changing demographics reshaping the U.S. economy
  • Relatively greater amounts of their own net worth and compensation risked
  • Focus on a single investment platform.

Recognizing the Results is the product of six months of collection, compilation and analysis of performance data submitted by general partner member firms of NAIC. NAIC engaged KPMG to manage collection and compilation of the performance data. The performance data covers firms’ performance spanning 1998-2011 year-end audited financial statements.

“The lack of diversity throughout the financial services industry is reminiscent of the days when baseball owners denied that there were qualified minority ball players. Or, the days when professional women were relegated to the secretarial pool,” added Ms. Nappier. “It is in everybody’s interest to be able to draw from the broadest pool of talent, and that includes gender and ethnic diversity. I commend NAIC for its leadership in bringing heightened visibility to this important issue.”

© 2012 PEPD • Private Equity’s Leading News Magazine • 10-2-12

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