Are Too Many Private Equity Funds Top Quartile?

Assessing investment performance for private equity is inherently difficult due in large part to the nature of illiquid assets. Compounding this problem, investors and researchers alike are bedeviled by the existing lack of comprehensive, high-quality data. The current state of affairs obscures answers to basic practical questions, leads to lack of standardization, and creates confusion. This paper examines measurements of “top quartile” performance, a status widely prized in the industry, especially in light of past research showing return persistence by funds raised by the same general partner. Using three popular data sources and applying metrics typically adopted in the industry, the authors demonstrate that even modest variations in methods can result in half of all funds being able to claim “top quartile” results. Sources of variation include methods of categorizing funds, definitions of vintage year, choice of the data source, specification of performance metrics, and treatment of geography and currencies.