2025 Market Overview
Definitions and Disclosures
There is a correlation between deal size and return: the smaller the better. But we are talking about deal size, not fund size. This is why all those large managers are telling you they only do small and middle-market deals. (Your diligence team will have to decide how true that claim is…) Notice, however, that where you aim for better return in the smaller segments, you are doing it with generally greater dispersion, so you need to choose wisely.
Now, when someone tells you that large funds cannot outperform, you can tell them they are incorrect. If they are adamant that facts don’t matter, you can tell them that they are using the wrong terminology: Fund size doesn’t matter. Deal size does.
Now that we've established what size funds have been attracting the most capital, is there anything to be said about returns based on fund size?
Look at how the spread of return, the risk, gets narrower as you get larger. Risk is highest at the smallest end of the market. Are you paid for that risk? This will come as a real disappointment to some (and dismissed as misinformation to others): No, you’re not. Investing in small, sub-$1 billion funds gets you the same average return as investing in funds that are 2-10 times larger, but with that added risk. Larger funds clearly have lower median returns but a lower risk of achieving that return. Is it wise to forgo a good return with lower risk because of a belief that small is inherently better? Wouldn’t it be better to have a balanced portfolio? Isn’t that what you have on the public side? Are you avoiding the S&P because it has large companies and smaller is better? Ask yourself those questions in the mirror and see how long it takes before you’re laughing at yourself.
“But wait,” you ask, “Haven’t we seen data that says smaller deals historically outperform larger deals?” You have because we have shown it to you. And we’ll show it to you again.
buyout spread of gross irr by ev
deal vintages: 2003-2024
buyout spread of irr by fund size
vintage years: 2000-2020
Fundraising
The fundraising desert continues to suffer through another year of drought.
2025 Market Overview
Definitions and Disclosures
Look at how the spread of return, the risk, gets narrower as you get larger. Risk is highest at the smallest end of the market. Are you paid for that risk? This will come as a real disappointment to some (and dismissed as misinformation to others): No, you’re not. Investing in small, sub-$1 billion funds gets you the same average return as investing in funds that are 2-10 times larger, but with that added risk. Larger funds clearly have lower median returns but a lower risk of achieving that return. Is it wise to forgo a good return with lower risk because of a belief that small is inherently better? Wouldn’t it be better to have a balanced portfolio? Isn’t that what you have on the public side? Are you avoiding the S&P because it has large companies and smaller is better? Ask yourself those questions in the mirror and see how long it takes before you’re laughing at yourself.
“But wait,” you ask, “Haven’t we seen data that says smaller deals historically outperform larger deals?” You have because we have shown it to you. And we’ll show it to you again.
buyout spread of gross irr by ev
deal vintages: 2003-2024
buyout spread of irr by fund size
vintage years: 2000-2020
There is a correlation between deal size and return: the smaller the better. But we are talking about deal size, not fund size. This is why all those large managers are telling you they only do small and middle-market deals. (Your diligence team will have to decide how true that claim is…) Notice, however, that where you aim for better return in the smaller segments, you are doing it with generally greater dispersion, so you need to choose wisely.
Now, when someone tells you that large funds cannot outperform, you can tell them they are incorrect. If they are adamant that facts don’t matter, you can tell them that they are using the wrong terminology: Fund size doesn’t matter. Deal size does.
Now that we've established what size funds have been attracting the most capital, is there anything to be said about returns based on fund size?
The fundraising desert continues to suffer through another year of drought.
Fundraising
