In a recent analysis of over 5,000 deals, 500 funds, and 242 private equity firms, Mantra Investment Partners found that the best-performing private equity funds share two key attributes:
- Funds with less than $350 million in assets outperformed larger funds
- Funds that focus on investing in esoteric industries or businesses had higher returns than broadly diversified funds
According to the data from 2011 to 2021, niche funds delivered an average internal rate of return (IRR) of 38% and a multiple on invested capital (MOIC) of 2.3x net of fees, while broadly diversified funds in North America averaged an 18% IRR and 1.7x MOIC. Even the top performers in mainstream private equity failed to outperform the mean of Mantra’s Niche Private Equity Index.
Mantra also looked at the performance of niche funds based on their size and found that regardless of size, funds with a niche focus still outperformed similar peers without one. Niche funds with less than $500 million in capital had an IRR of 40%, while funds with between $500 million and $2 billion had an IRR of 32%.
The report concluded that rising fund sizes can risk losing focus from successful strategies, potentially leading to lower returns. It also suggested that investors may be missing out on better performance by favoring larger generalist fund managers over smaller private equity firms.
However, the report also emphasized the need for careful due diligence when selecting smaller PE managers and funds, as returns dispersion is wider among smaller funds.
