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PE team turnover a key to future performance, says report

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Capital Dynamics, a private asset manager, and the London Business School’s Coller Institute of Private Equity have released a joint report on the connection between team stability and track records.

 
Contrary to widely held beliefs, they have concluded that higher turnover equals improved private equity performance.
 
Until now, there was limited evidence to support the theory that team stability is necessary for continued performance; thus Capital Dynamics and the London Business School embarked on a project to gather and examine the data behind the track records. Using data mined from Capital Dynamics’ due diligence database, the researchers analysed the backgrounds and investments of management teams together with corresponding deal and fund performance attributed over a 20-year period. 
 
Initial findings on 56 managers, released in 2011, indicated turnover has a positive effect on performance. The full findings, on 145 senior fund management teams from around the world and dating back to 1990, reveal an even stronger link between turnover and positive performance.
 
Teams that experienced turnover from one fundraising to the next performed better on the next fund; a one per cent increase in turnover led to a 10 per cent increase in subsequent net IRR.
 
The average net IRR of fund managers with the highest turnover was 25 per cent compared with 11.5 per cent for those with the lowest turnover.
 
The impact on performance differed according to professionals’ backgrounds. Between funds, higher turnover of professionals with operational backgrounds led to a significant improvement in performance, while the turnover of professionals with financial backgrounds did not impact performance.
 
Fund managers with higher turnover during recessions performed better than those with lower turnover; a one per cent increase in turnover led to a 3.1 per cent increase in net IRR.
 
“Our findings suggest a new team attribute – team evolution. Team evolution should be considered during due diligence, as the ability of a team to adapt to changing economic environments – as our study shows – can be more important than the team’s stability,” says Ivan Herger, head of research at Capital Dynamics.
 
“This study shows how a systematic and thorough examination of a large data set can provide novel evidence that can be used in practice,” says Francesca Cornelli, academic director at the London Business School’s Coller Institute. “In particular, evidence that when conducting due diligence it is important to focus not only on the skills and expertise of the single individuals but also on the dynamics of the entire team.”

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