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Research Shows PE Fund Team Turnover Has a Positive Effect

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August 29, 2013

New research from Europe is turning on its head the common wisdom that says that team stability is important for performance and returns. Contrary to widely held beliefs, higher staff and executive turnover equals improved private equity performance, say the report’s authors.

 

There is now evidence to support the theory that team evolution is necessary for continued performance, and it is based on a data rich study of 145 senior fund management teams from around the world and dating back to 1990.

 

There is actually a much stronger link between staff turnover and positive performance than team stability, so LPs should be seeking what the researchers call team evolution, that is, a staff turnover of at least 1%, according to research by Capital Dynamics and the London Business School’s Coller Institute of Private Equity.

Key conclusions: 

– Teams that experienced turnover from one fundraising to the next performed better on the next fund; a 1% increase in turnover led to a 10% increase in subsequent net IRR.

– The average net IRR of fund managers with the highest turnover was 25% compared with 11.5% for those with the lowest turnover.

– The impact on performance differed according to professionals’ backgrounds. Between funds, higher turnover of professionals with operational backgrounds led to a significant improvement in performance, while the turnover of professionals with financial backgrounds did not impact performance.

– Fund managers with higher turnover during recessions performed better than those with lower turnover; a 1% increase in turnover led to a 3.1% increase in net IRR.

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