A few days ago, the California Public Employees’s Retirement System (CalPERS), one of the country’s largest investors in private equity and venture funds, released performance data on all of its underlying funds. Dan Primack at Fortune made the data available on his blog and did a quick sorting of the data to show the funds with the highest internal rates of return. The data, however, are massively rich, and are begging for further analysis. They can provide considerable insight into CalPERS’s investment strategy, as well as the overall performance of PE and venture funds over a broad time period.
Below I have constructed a simple visualization of the data by vintage year. Starting in 1993 in the upper-left cell and finishing in 2008 in the lower-right, each funds’s cash-in and cash-out dollars are plotted on the x- and y-axes respectively. Note: data after 2008 was excluded from this analysis due to the immaturity of these funds.
Because of the large differences in fund sizes, log-transformations of both axes were taken so that the data are compared at a reasonable scales. Next, a red dashed line is plotted in each cell to indicate where cash-in equals cash-out, or more simply, the break even point for each year. This line helps interpret the performance of funds. Those plotted above the line are performing well, while those under are not. Due to the large number of funds in each vintage year with similar performance, this type of plot can result in many points being added at the same place. This over-plotting can hide interesting features of the data, or cause the plot to be misinterpreted. To avoid this and help highlight the density of similarly performing funds, I have adjusted down the transparency of each point. Areas of dark black in each cell indicate a tight grouping of similarly performing funds.
Many interesting features of the data jump out immediately. First, it is very clear that CalPERS has steadily increased its exposure to PE and venture funds over this time period. Next, in terms of overall performance, the graphs are quite telling. With CalPERS’ increased exposure to these funds through the late-1990′s we can see a large amount of variance in their performance. From 1998-2001 there are many big losers and big winners among funds. In fact, there is one very big loser in 2001 relative to funds that raised about the same cash-in: Yucaipa Corporate Initiative Fund I.
There appears to be a stabilization beginning in 2002, with a banner year for most funds in 2003, and then the vast majority of funds begin to settle on the break-even line through 2008. As with most analyses of this type, we are left with more questions than answers. What caused the shift toward stability in 2003? Or conversely, what was causing so much variance in earlier years? In most cases this is a function of asymmetry in available information about the market among competitors. It may have been that during the tech boom of the late-1990′s the signal-to-noise ratio in this market was much higher than in the late-2000′s. This, however, leads to the obvious follow-on question: is there a similar phenomenon occurring now?