Tech-focused private equity and venture capital firm TA Associates Management LP generated the best returns for investors out of more than 560 large private equity firms in 2022, according to the annual HEC-DowJones Private Equity Performance Rankings, released this week.
Exposure to the technology sector remains a key driver of private equity performance, at least as it is measured by the HEC-DowJones rankings, which in recent years have favored tech-focused investors. Four of the top five firms on the list currently have as many or more investments in the technology, media and telecommunications sector than in any other sector, according to S&P Global Market Intelligence data.
The outperformance of firms with a tech-heavy portfolio persisted in 2022 despite tumbling valuations across the sector, noted Oliver Gottschalg, a professor at HEC School of Management in Paris, which developed the PE performance ranking system. The S&P 500 IT index shed about 30% of its value in 2022, compared to an 18% drop for the S&P 500.
"You have some players with a tech focus who dropped down in the ranking or even dropped out of the ranking. [But] it is not as catastrophic as some people may have expected," Gottschalg said.
One possible explanation is that the HEC-DowJones model considers as part of fund performance the ratio of distributed to paid-in capital, or DPI, also known as cash-on-cash returns, Gottschalg said. By that metric, tech-focused funds between three and 14 years old still look pretty good.
"Regardless of what happens to valuations, those cash returns don't go away," Gottschalg said.
The professor suggested some firms may also have benefited from targeting their tech investments to some particular niche that has been insulated from the more recent downturn. That could include parts of the tech sector with large government clients, Gottschalg said.
The rankings rely on information drawn from private markets data source Preqin as well as directly from the private equity firms themselves. Instead of evaluating performance solely on an internal rate of return, a metric traditionally used by private equity firms to measure fund performance, the methodology combines six indicators that aim to capture aggregate performance of all funds managed by a private equity firm.
To qualify for this year's ranking of large buyout houses, the firms had to meet various criteria, including raising at least two funds between 2009 and 2018. They also had to have raised at least $3 billion in total over that period and have at least 10 years of performance data to evaluate.
Geographic advantage
For the first time, the 2022 PE performance rankings broke down the results by geography, ranking the top 10 performers in North America and Europe. Boston's TA Associates led the North American top 10 in 2022, while Netherlands-based Waterland Private Equity Investments BV was No. 1 on the European list.
The findings suggest proximity to portfolio investments is a significant factor in private equity performance.
"There's lots of advantage to having your home base in a given geography," Gottschalg said, noting that no North America-based private equity firm cracked the top 10 list for Europe. The reverse was also true.
Gottschalg suggested that reflects a strong "local advantage" to private equity strategies. Firms may do best in their home territories because that is where their professional networks are strongest and where they have the best view on investment opportunities and potential exit routes, the professor said.
"None of these fund strategies with a specific geographic focus have been able to excel unless the GP was actually born in that region," Gottschalg said.