By Elisangela Mendonca
Source: HEC-Dow Jones
In a year in which technology set the tone of private equity investing around the world, US-based firm Francisco Partners has proven that its exclusive sector specialism can be lucrative too.
The tech-focused buyout group was crowned top performer in the 2020 HEC-Dow Jones Private Equity Performance Ranking. Francisco Partners climbed up from the 16th position in 2019, overhauling three-years-in-a-row-winner, Thoma Bravo, which came in 6th.
The annual ranking, created by Oliver Gottschalg and now sponsored by asset management consultancy MJ Hudson, analysed the performance of buyout funds raised between 2007 and 2016, drawing on data provided by Preqin and directly from firms.
The study calculates the aggregate performance of a private equity firm, taking into account different vintage years, and relative and absolute returns. Data from 529 private equity firms and 977 funds were analysed with an aggregate equity volume of $1.4tn.
The winner
With an overall performance score of 2.4 – way above the 0.49 posted in 2019 – Francisco Partners had a busy year.
In June last year, it raised nearly $10bn across three funds to invest in technology companies, including $7.45bn for its sixth flagship fund, its largest investment pool to date. Since its foundation 20 years ago, the San Francisco-headquartered firm has amassed $24bn.
A giant tech investor, Francisco also kept busy buying companies last year, many of them carve-outs from large corporations.
In late October, the firm agreed to acquire the MyFitnessPal smartphone app from Under Armour for $345m. A few days earlier it said it would buy cybersecurity company Forcepoint from Raytheon Technologies. In December, it closed another large deal: the $1.45bn acquisition of the international division of automotive technology company CDK Global.
Similarly to previous years, US firms dominated the outperformers' list, securing a total of 15 out of the 20 top spots in 2020. The highest ranked non-US firm was London-based Vitruvian Partners, which was third in the list. In 2019, the firm was in 12th position.
The firm, called a "very private company" by a spokesperson who declined Private Equity News' interview request, was launched in 2006. It has since invested in more than 50 companies and has €10bn in assets under management run by a team of more than 100 people in London, Stockholm, Munich, Luxembourg, San Francisco and Shanghai.
Last year, Vitruvian closed its fourth buyout fund at its hard cap of €4bn, less than three months after its formal launch. In its latest deal disclosed earlier this month, it invested €100m in the Irish financial services group Carne.
Meanwhile, Genstar Capital Partners took second place, after ranking third in 2019 (see the full list below).
Recipe for success
Sector-focused buyout groups, such as Francisco Partners, tend to outperform generalist strategies by 4.7%, according to a report by Cambridge Associates. The Boston-based investment firm found that strategies that focused on a single sector had on average an internal rate of return of 22.6%, while investments made by generalist funds had an internal rate of return of 17.9%.
Professor Gottschalg, however, believes that sector specialism is only part of the picture, in a complex industry such as private equity. His annual ranking, he adds, is not designed to point to the next winner – "not necessarily the same funds will perform well going forward".
Although cautious, he says throughout the years, he observed firms with a "fund size discipline" outperformed.
"The average amount raised from 2007 to 2016 for the top 5 Firms of the 2020 ranking is just over $4bn. This is less than the number as for the top 5 of the 2013 ranking (just over $5bn), when we looked at vintages 2000-2009, even though the industry itself grew substantially in that time," the expert points out.
According to Gottschalg, this is an aspect to consider that may be an ingredient of many top performers – "even though it will be neither necessary nor sufficient condition for success", but a combination of factors, he says.
Top 20 private equity firms by performance
Rank, Firm, Score*
- Francisco Partners, 2.4
- Genstar Capital Partners, 1.79
- Vitruvian Partners, 1.71
- Veritas Capital, 1.65
- Waterland Private Equity Investments, 1.57
- Thoma Bravo, 1.48
- Hg Capital, 1.48
- Leonard Green & Partners, 1.47
- Clayton, Dubilier & Rice, 1.29
- Quadrant Private Equity, 1.22
- General Atlantic, 1.1
- New Mountain Capital, 0.88
- Ares Management, 0.51
- Crestview Partners, 0.5
- Kohlberg & Company, 0.43
- Audax Group, 0.4
- Vista Equity Partners, 0.35
- Welsh, Carson, Anderson & Stowe, 0.33
- Astorg, 0.32
- Oak Hill Capital Partners, 0.27
Source: HEC-Dow Jones.
*The aggregate performance score is relative to all the firms analysed. PE firms with average performance have a score of 0.