Small PE firms outshine the largest over returns

THE biggest private equity firms have not delivered the best returns, new research from European business school EDHEC showed yesterday.

A firm’s size has a huge influence on its investments’ level of return – and this overwhelmingly seems to favour small independent firms over larger groups.

Large firms which hold a large number of investments at the same time “underperform substantially”, according to the study that analysed 7,500 private equity investments worldwide over 40 years.

Super-sized private equity houses such as Carlyle, with more than 400 investment managers and $98bn (£62bn) under management or KKR with $55.5bn under management and 650 staff, say they use their global reach and expertise to deliver market-leading returns. But layers of hierarchy and higher communication costs in big firms created diseconomies of scale, outweighing the benefits of pooling knowledge, the report said.

Longer duration deals generated much lower returns than those held for less than two years. One in four deals achieved an internal rate of return (IRR) above 50 per cent, while the median IRR was 21 per cent.