Timing is everything, and private equity is no exception. Fund managers could conduct the most thorough due diligence, develop the best post acquisition plans to maximize profits, but if they aren’t making the right investments at the right time, investors will likely be taking their commitments elsewhere.
While many GPs can claim they maintain a specialized strategy and are able to find opportunities in proprietary ways, it can be difficult to determine if this is the case or if they are simply finding deals when the market makes it easy to do so. The PERACS’ Procyclicality Score provides deeper insight into evaluating the nature of a GP’s deal sourcing track record. It provides a calculable comparison of the fund’s investment activity with the pattern of investment activity of the overall PE universe as a proxy for the fund’s quality and reliability of deal flow.
In PERACS’ Procyclicality Score, a correlation of 1 means that a GP invests in a perfectly pro-cyclical fashion; in other words, it has the same pattern as the overall PE industry in terms of investment timing. GPs with a correlation of 1 are not likely to get many deals during times when deals are difficult to find and probably don’t have a good set of proprietary sourcing mechanisms in place.
On the other hand, a correlation of less than 1 means that the client invests in a more independent fashion – the extreme case being a score of -1, i.e. a hypothetical perfectly counter-cyclical investment timing. When GPs find deals during periods when others can’t probably, it is a good indicator or proprietary deal flow, the highly valuable and marketable trait for any GP.
The Uniqueness Score is one of the many variables used to calculate the HEC-Dow Jones PE Fitness Ranking which PERACS’ Oliver Gottschalg helps conduct and his empirical research shows that (all else equal) lower Procyclicality Score is related to subsequent outperformance.
How unique is your GP when it comes to finding deals?