Factors that help forecast the returns of a private equity fund

In the disclaimers used by private equity funds we find the phrase: “past performance does not guarantee future returns”. However, studying the past is important to detect patterns that help anticipate the future and, therefore, there are certain factors that help predict the returns of a private equity fund.

Although studying the past offers no guarantees about the future, it does allow us to draw conclusions about causal elements. In this way, in-depth and detailed analysis of the factors that may have led to the success or underperformance of a fund allows us to evaluate future opportunities based on experience and statistical analysis. Through robust and sound data collection, we can distinguish certain variables that greatly influence the performance of an investment opportunity, called Key Success Factors (KSF).

Data help have a better understanding of our surroundings. As a result, it is crucial to collect a large amount of data and carry out a proper analysis that allows us to draw clear and relevant conclusions. That said, it is important to stress that the private equity market is very opaque; there is not much information available and public sources are not very reliable. Since it is a sector in which transactions are carried out with private companies, information about the assets is usually in the hands of very few agents, generally in the hands of their managers (General Partners or GPs) and advisors who participated in the transaction. Similarly, public sources of information about private equity funds often include estimates about the market rather than providing comprehensive data that includes all participants. Therefore, the information on managers and companies that tends to be more accessible, in relative terms, is the one linked to larger companies and funds. Due to their size, many companies that are acquired by managers with a large number of assets under management (AUM) tend to provide a higher level of information compared to smaller companies.

Regarding this last point, the absence of data is more noticeable at the lower end of the market (Lower Mid-Market or LMM) where SMEs, the investment focus of Qualitas Funds, are found. Within this segment, companies tend to be less professionalized and the GPs that invest in them are smaller in size based on their AUM and team of professionals. This team structure implies that managers lack professionals available to constantly upload and update data to industry information platforms (e.g. Preqin). As a consequence, in the LMM segment the complexity of gathering information that can then be used to enrich the analysis of future investment opportunities increases.

Qualitas Funds’ position as a fund of funds gives it preferential access, compared to the rest of the market, to information from many GPs, in different countries, and with data on a large set of companies. Thus, Qualitas Funds is able to collect a large amount of data about the managers’ strategies, their track record, the underlying companies in their portfolios, etc. Thus, Qualitas Funds analyzes more than 800 funds and c.130 co-investments per year¹ (displayed in Figure 1) and, among the investments it carries out, has access to information on 200 private companies in each of its funds².

Figure 1: Opportunities analyzed for Qualitas Funds V in 2022-2023.

Source: Qualitas Funds data base.

In addition, the constant and robust flow of opportunities allowed us to develop a proprietary database that includes information on more than 45,000 funds and 19,000 managers³. Through this database, Qualitas Funds is able to perform insightful statistical analysis immediately and with updated data, which allows us to identify patterns in the most successful managers in different strategies and geographies. By reconciling the information in the database with the returns obtained in the invested funds, it is possible to determine the similar variables among them and how they influence in generating better returns in their portfolios.

For all the above reasons, we believe that Qualitas Funds’ unique position as a fund of funds focused on the LMM, characterized by high information opacity, allows us to benefit from certain advantages. Access to a wealth of information, which is included in a structured and constantly updated database, allows us to dig into the key variables that drive the returns of the best funds. These KSFs allow Qualitas Funds to evaluate different investment opportunities with a data-driven perspective that can be easily adapted to each particular situation. Through these factors and its extensive proprietary database, Qualitas Funds is in a better position to more accurately forecast the performance and returns of a private equity fund. In the following articles we will examine in detail the key factors that we have identified as predictors of success.

Note 1. Funds and co-investments analyzed and invested by Qualitas Funds V in 2022-2023.

Note 2. Qualitas Funds II quarterly report Q2 2023.

Note 3. Proprietary data base “Qualitas Insight”.