GP churn boosts IRR

Alice Murray
14 August 2013

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Further to initial findings announced in 2011, additional research by Capital Dynamics and London Business School’s Coller Institute of Private Equity has concluded that higher team turnover in buyout houses improves overall performance.

In 2011, the joint research project had assessed 56 private equity firms and found that a 5% increase in staff turnover between funds leads to around a 12% higher net IRR on average. Using data from Capital Dynamic's due diligence database, the study analysed the backgrounds and investments of management teams against corresponding deal and fund performance over a 20-year period.

Over the past two years, Capital Dynamics and the Coller Institute expanded their research and have now assessed 145 senior fund management teams globally, looking back at performance and staff turnover as far back as 1990.

The improved findings revealed teams that experienced staff turnover from one fundraising to the next performed better on the next fund, whereby a 1% increase in turnover led to a 10% boost in subsequent net IRR.

The study found the average net IRR of fund managers with the highest team turnover was 25% compared with 11.5% for those with the lowest turnover.
As highlighted in the first report, the fund's performance varied according to team member's backgrounds. Between funds, a higher turnover of professionals with operational backgrounds led to a significant improvement in performance, while turnover of those with financial backgrounds did not impact performance.

Furthermore, the study found that fund managers with higher team churn during recessions performed better than those with more stable teams. Those with a 1% increase in turnover led to a 3.1% increase in net IRR.

The study is the first of its kind to challenge the traditional belief that team stability is crucial to success. "Our findings suggest a new team attribute – team evolution. Team evolution should be considered during [fund selection] due diligence, as the ability of a team to adapt to changing economic environments – as our study shows – can be more important than the team's stability," said Ivan Herger, head of research at Capital Dynamics.