Institutional investors looking to generate greater returns should consider allocating capital with diverse-owned private equity firms. Examining the Returns: The Financial Returns of Diverse Private Equity Firms is a report by the National Association of Investment Companies (NAIC) that quantifies the degree to which these diverse-owned firms consistently outperform their respective benchmarks and generate alpha to limited partners.
Written by Meredith Jones of AON Hewitt and compiled with assistance from KPMG LLC., the report’s findings are a testament to the skill of diverse managers in sourcing and executing their investment strategies:
- Diverse-owned firms generated a net of fee Internal Rate of Return (IRR) of 16.15% for the ten-year reporting period ending in December 2015, compared to 11.3% (IRR) for the Cambridge US Buyout benchmark for the same period.
- Diverse PE Funds included in the NAIC Diverse Private Equity Index outperformed the median Cambridge U.S. Private Equity funds during most vintage years.
- On an IRR and Multiple on Invested Capital (MOIC) basis, Diverse PE Funds outperformed 62.5% of the time.
- On a Distributed to Paid-in capital (DPI) basis, Diverse PE Funds outperformed 56.3% of the time.
- Over longer time horizons, Diverse PE Funds included in the NAIC Private Equity Index consistently outperformed both median and upper quartile funds in the Cambridge U.S. Private Equity and the Cambridge U.S. Buyout cohorts.
Examining the Returns updates a similar study conducted in 2012 and it confirms that prior report’s similar findings of outperformance from the often-overlooked segment of the private equity industry. Both conclude that superior performance has led to increased capital flowing into these firms, led by New York Common, Texas Teachers Retirement System, Texas Employees Retirement System, New York Teachers Retirement System, CalPERS, CalSTRS, Verizon, Exelon Corporation and the Virginia Retirement System.
While these and other investors have recognized the talent within the diverse manager space and have become proponents for emerging/diverse managers, the total invested with diverse-owned managers remains a disproportionately small amount of the whole. In many cases, the AUM allocated to diverse asset managers represents 10% or less of an investor’s total investable assets. One goal of this report and other related NAIC efforts is to eliminate that disparity.
The full report is available on the NAIC Website.
About the NAIC: The National Association of Investment Companies (www.naicpe.com) was founded in 1971 to serve as the industry association for diverse-owned and emerging managers, a number of which rank among the best performing private equity firms and hedge funds in the United States. With more than 40 member firms representing over $85 billion in assets managed, the NAIC is a recognized thought leader on the U.S. Emerging Domestic Market (EDM).
