Diverse And Minority Private Equity Firms Outperform General Industry

NEW YORK, Oct. 1, 2012 /PRNewswire/ -- Diverse and minority-owned private equity firms have produced superior investment returns over a sustained period benchmarked against the general PE industry, according to Recognizing The Results, a performance survey report commissioned by the National Association of Investment Companies ("NAIC"). NAIC is the industry association representing diverse and minority-owned private equity firms and firms focused on the U.S. Emerging Domestic Market ("EDM"). Recognizing The Results was released today at NAIC's 42nd Annual Meeting & Convention in Palm Beach, Florida.

Recognizing The Results compared the audited financial returns of NAIC firms against the broader private equity market across four industry benchmarks for the period 1998 – 2011:

  • NAIC Firms Outperformed the Upper Quartile of the PE Industry in Realizing Investment Returns (NAIC Firms 20.9% vs. 11.8% for all U.S. PE and 14.7% for Buyout subset)
  • On a Median and Capital-Weighted Basis, NAIC Firms' Internal Rate of Return Performance Was Superior to the Upper Quartile of the PE Market and Buyout Subset
  • NAIC Firms Significantly Outperformed the PE Industry Returning Capital to Investors (NAIC Firms 160% vs. 67.1% for all U.S. PE and 89.1% for Buyout subset)
  • In 7 of 10 Years, NAIC Firms Realized Returns in the PE Industry's Top Quartile

Commenting on these findings, Connecticut State Treasurer Denise L. Nappier, stated:

"As principal fiduciary of Connecticut's $25 billion pension fund, I am pleased to see that NAIC's study of minority private equity managers clearly demonstrates the outperformance that NAIC firms have generated over their peers, and the benefits of diversification for pension funds and their beneficiaries. 'Recognizing the Results' is a call-to-action for institutional investors everywhere that have yet to fully embrace diversity as a factor when seeking to do business with the best in class -- a perquisite to achieving a sustainable rate of return over the long haul."

An analysis of the findings indicates a set of common factors contributing to NAIC Firms' comparatively superior performance:

  • Disciplined adherence to investment strategies
  • Better terms and unique investments sourced through proprietary networks
  • Emphasis on applying operational improvements in portfolio companies
  • Investments tied to rapidly changing demographics reshaping the U.S. economy
  • Relatively greater amounts of their own net worth and compensation risked
  • Focus on a single investment platform.

Recognizing the Results is the product of six months of collection, compilation and analysis of performance data submitted by General Partner member firms of NAIC. NAIC engaged KPMG LLP ("KPMG") the global audit, tax and advisory firm, to manage collection and compilation of the performance data. The performance data covers firms' performance spanning 1998-2011 year-end audited financial statements. The financial returns of a representative sample of NAIC's diverse and minority private equity firms and those focused on the EDM presented in Recognizing the Results serves as a proxy for the broader sector as a whole.

The performance data required for benchmarking against industry metrics was identified by leading fund of funds managers ("Fund of Funds Working Group") with significant experience investing in this sector on behalf of institutional investors. According to Recognizing The Results, NAIC firms represent a range of investment strategies and focus, and their partnership groups and investment professional teams are significantly more diverse than the general private equity industry. For example, minorities own 78.57% of NAIC firms and 69.23% of NAIC firms have investment operations with at least 50% women or minority investment professionals.

Recognizing The Results also captured critical demographic data highlighting the enduring challenges faced by diverse and minority managers accessing institutional investment capital despite superior financial returns in many cases:

  • The collective assets under management ("AUM") of NAIC members constitute just 0.24% of the entire PE market
  • The average fund managed by NAIC Firms was $156.3 million, compared to the general PE industry average fund size of $469 million,[1] roughly one third the AUM

"The lack of diversity throughout the financial services industry is reminiscent of the days when baseball owners denied that there were qualified minority ball players. Or, the days when professional women were relegated to the secretarial pool," added Connecticut State Treasurer Nappier. "It is in everybody's interest to be able to draw from the broadest pool of talent, and that includes gender and ethnic diversity. I commend NAIC for its leadership in bringing heightened visibility to this important issue."

Despite the strong performance of NAIC firms, the significant majority of institutional investors do not invest capital in diverse and minority private equity firms. The fact that NAIC Firms collectively managed only 0.24% of total private equity assets at year-end 2011 is a sobering reality check. For institutional investors managing assets on behalf of diverse populations such as public pensions, corporate pensions, labor unions and university endowments, Recognizing The Results is a compelling fact-based analysis of the superior performance of diverse and minority private equity managers. These findings offer a thoughtful assessment of the enduring obstacles deterring larger allocations of institutional investment capital to this high-performing sector of private equity.

To download a copy of Recognizing The Results, log on to: www.naicpe.com

Founded in 1970, The National Association of Investment Companies is a 501( c )(6) trade association representing diverse and minority private equity firms and those focused on the U.S. Emerging Domestic Market. The NAIC also operates The Marathon Foundation, a 501(c)(3) entrepreneurial development network.

[1] Preqin, July 2012

SOURCE National Association of Investment Companies