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Tech focus shapes PE performance rankings

Technology-focused middle-market firm Accel-KKR LLC had the highest private equity performance score in 2021 as measured by the annual HEC­-DowJones Private Equity Performance Rankings, released Jan. 24.

Accel-KKR, which has 72% of its investments in the technology sector, according to S&P Global Market Intelligence, was joined in the top 10 by other tech- and software-focused companies such as Francisco Partners Management LP, which held the top slot last year, as well as Great Hill Partners LP and Thoma Bravo LP.

"We definitely see the fruits of a five-, 10-, 15-year period in which the idea of having buyouts that have a tech or software component, that was in general a good idea. That was one of the recipes that led to very strong returns," said Oliver Gottschalg, a professor at HEC School of Management in Paris who developed the rankings.

The methodology considers the aggregate performance of all buyout funds a firm has raised over a decade, but the score is not an IRR-type annual return measure nor a money multiple. It represents the merger of six performance indicators and aims to show how much better one firm is compared to the average private equity firm.

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It was Accel-KKR's first year of eligibility for the rankings, which are limited to private equity firms that have raised at least $3 billion.

The 2021 rankings considered the performance of all funds raised between 2008 and 2017. In statistical terms, Accel-KKR's performance was more than three standard deviations better than the average PE firm over that period, Gottschalg said.

"That puts them in the 0.1% of the overall distribution, like a one-in-1,000-type of performer," he said, adding that it is likely Accel-KKR has been a strong performer for a long time, maybe years before it cleared the $3 billion fundraising threshold for inclusion on the list.

Record PE year and performance

Private equity set multiple new records in 2021, a year of frenzied deal-making. But Gottschalg said his model was designed to be resistant to short-term trends. "In particular, we don't want the ranking to be overly influenced by people who are just very optimistic in writing up book values," he said.

"Yes, the record year of 2021 is to some extent reflected in the score. But then again, we're looking at a decade of vintages, 2008 to 2017, so we're not overly influenced by those short-term developments," he added.

Some firms have shown staying power on the list while others have come and gone, possibly because teams fell apart or certain investment strategies petered out, Gottschalg said. He is trying to better understand why some private equity firms, like veteran buyout firm Clayton Dubilier & Rice LLC, seem to do well in the rankings year after year.

Private equity firms "tend to grow themselves to death," with their performance dragging as assets under management increase, he said. That is not the case for either CDR or Hellman & Friedman LLC, two large firms that have done well according to his methodology.

"It's not impossible to achieve stellar returns, even at that level of scale," he said.