EDHEC: Picking winners in private equity

27 januari 2026

Private Equity

By Evan Clark, Senior Private Market Analyst, EDHEC Infrastructure & Private Assets Research Institute

Identifying future outperformers is the key value-add for allocators. SIPA’s ‘Picking Winners’ shows that managers with strong alpha persistence are more likely to outperform in subsequent vintages, while weak persistence predicts underperformance.

Backing managers with high persistence scores increased the odds of achieving future alpha — 2:1 versus a coin-flip 1:1 — compared with just 1:2 odds for managers with low persistence. This is not a subtle edge, it’s the equivalent of playing with home-court advantage in the NBA, where home teams win more than 60% of the time.

Fund of funds managers

Despite the increased competition from the secondaries market and evergreen funds, there is still a differentiated role for a fund of funds manager. The former can only allocate to those opportunities for sale in the market, while the fund of funds can access the entire primary funds market (and secondaries if in the mandate), diversifying by vintage. They have more control and latitude over portfolio construction.

Building out a fund of funds portfolio for an institutional fund or a separately managed account (SMA) will require allocating across a number of vintages, fund sizes, and geographies. Fund managers can benefit from better tools and data to benchmark prior funds returns and evaluate and convey the performance of their own portfolio(s) of funds. This can complement the fund manager’s existing strategy and due diligence process to uncover alpha generating managers.

By back-testing alphas as of 2018 and tracking subsequent vintages through 2024, we find that some managers display persistence, even if on average this is not the case. Managers with high positive alpha and persistence scores went on to deliver future outperformance in subsequent funds at a higher rate than the rest of the group, while those with negative scores did so at a lower rate.

Small and mid-market funds – fertile ground

The alpha opportunity in the smaller and lower middle market is desirable to most institutional investors, but the teams often do not have the bandwidth to navigate the market internally. Accessing this segment via a fund of funds drawdown vehicle or an SMA is more practical. The higher fee burden needs to be balanced against the greater alpha opportunity and the differentiated exposure. The opportunity does not come without risk. In addition to the higher median alpha in small and middle market buyout funds, the dispersion was significantly greater. A lot of sizeable outperformers, but also many funds that performed very poorly.

Conclusion

Our results suggest that using the privateMetrics® indices and applied tools such as Direct Alpha and Custom Benchmarking can help fund managers in picking funds and measuring fund performance. This can augment the existing fund selection process, potentially improve the odds of outperformance, particularly in the small and mid-market segments where return potential is greatest, but risk of capital loss is also greatest.

Fund of funds can continue to justify their role by identifying alpha-generating managers and avoiding value destroyers in an increasingly competitive private markets landscape.