Investors that want to find out which of their PE portfolio of investments are underperforming can analyze early cash flow and net asset value (NAV) uplift data to get a better idea of how the fund might eventually perform, according to a new quantitative study by Pantheon . The research found that funds which distributed more cash than their vintage peers during the first few years of their commitment period were more likely to be top quartile performers over the long term.
It also found that a deep J-curve, relative to vintage peers, “signaled a significantly higher probability” that a fund would be bottom rather than top quartile. Essentially, the research showed that a high rate of distributions and portfolio value uplift early on have a positive effect on future performance. Pantheon gave an explanation or interpretation of why that might be the case, but for our purpose here, the key point is that information can be gathered at an earlier stage than usual. Patterns of capital calls, distributions and NAV uplifts of a GP’s current fund can be used to by LPs to decide about subsequent commitments, according to Pantheon because GPs typically start raising new funds before investments have not been completely realized on the previous fund. And as said above, it can also help to take action regarding potential underperformance. (Image source: Pantheon)