Persistence of Returns

As we will see in Chapter 17, managers of public equities might produce top quartile returns for a time, but those returns rarely persist for very long. But it's quite different in the world of PE, where partnerships that develop excellent track records tend to persist in the top quartile for many years—generations, in some cases. One explanation for this persistence has to do with the quality of the deal flow that these successful partnerships see. Once a PE firm establishes itself as superior to most of its peers, entrepreneurs will seek it out, and they will often accept a slightly lower-priced deal from a top firm rather than taking top dollar from a lesser firm.

The reason an entrepreneur might be willing to accept a slightly lower price is that top PE firms bring much more than capital to the party: They offer advice based on their own vast experience with similar firms; they can source executive talent the firm will need as it grows; and the depth of talent in top firms ensures that the entrepreneur won't have to settle for the second team when, as it always will, the going gets tough.⁴