Do specialist funds outperform generalist funds in private equity?

Specialized expertise matters. That’s what some private equity fund managers believe will help them build a notable track record. Amid tough exit conditions, cautious fund investors may also look to sector specialists as they aim to meet specific risk-return objectives.

According to Bain & Company’s Global Private Equity Report 2024, exiting deals will now ‘require doubling down on organic value creation’, as well as a ‘compelling exit story’. But would it help to specialize in a sector? Does allocating to sector-specialist funds lead to outperformance over generalist funds?

Our performance data isn’t so clear-cut.

Preqin classifies generalist or sector-agnostic funds as ‘diversified’ funds, while sector-specialist funds are classified under ‘core industry’ funds. For the purposes of this article, we will use ‘sector-specialist’ and ‘generalist’ to describe the funds in question.

Specialist private equity funds distributed a higher percentage of called-up capital to LPs

Looking first at the distributions to paid-in (DPI) ratio, sector-specialist funds have indeed outperformed generalist funds, at least for funds of vintages up to 2019 (Fig. 1). Those of vintages between 2012 and 2015 have returned a median DPI of 136.7%, higher than the 130.0% delivered by generalist funds. For vintages between 2016 and 2019, sector-specialist funds have delivered a DPI ratio 7.4 percentage points (ppts) higher than that of generalist funds. It’s still too early to tell for those funds with vintages between 2020 and 2023.

Fig. 1: Median DPI of sector-specialist and generalist funds, vintages 2012–2023

^{Source: Preqin Pro}

Cash-on-cash metrics, such as DPI, have become more reliable for LPs than internal rate of return (IRR) in recent years. DPI – the measure of the value of distributions paid to the investor relative to the money invested – is less subjective than IRR, which is an estimated figure that relies on both cash flows and the valuation of unrealized assets.

Generalist private equity funds had higher IRR in recent vintages

When considering net IRR though, sector-specialist funds outperformed generalist funds for vintages up to 2019 (Fig. 2). For vintages between 2012 and 2015, they delivered 17.4% in median net IRR, outperforming generalist funds (15.6%). Those with vintages between 2016 and 2019 also outperformed generalist funds by 0.8ppts, delivering 18.0%. However, for recent vintages between 2020 and 2023, sector-specialist funds delivered 11.5% in net IRR, lagging generalist funds by 1.6ppts.

Fig. 2: Median net IRR of sector-specialist and generalist funds, vintages 2012–2023

^{Source: Preqin Pro}

While IRR is a common metric and traditionally used to evaluate the performance of private equity, it may have some downsides for evaluating performance. As IRR is based on certain assumptions related to net asset value, capital calls, and distributions, it may be inflated due to overvaluation or rapid capital deployment early in a fund’s life cycle.

Large generalist private equity funds perform better than specialist ones

Looking at a wider sample size of funds with vintages between 2012 and 2023, sector-agnostic mega funds worth more than $2.5bn have outperformed sector-focused funds in terms of DPI and median net IRR by 10.1ppts and 1.2ppts, respectively (Fig. 3).

Fig. 3: Performance of generalist funds over sector-specialist funds by fund size, vintages 2012–2023

^{Source: Preqin Pro}

Generalist funds between $1bn and $2.5bn have similarly demonstrated significant outperformance against sector-specialist funds in the same size bracket in terms of DPI, delivering 10.4ppts above specialist funds. In terms of median net IRR, the outperformance is just 0.3ppts above specialist funds.

Yet for funds smaller than $1bn, sector-specialist funds outperformed generalist funds by 1.9ppts in terms of DPI and 0.7ppts in terms of median net IRR.

According to Preqin’s data, it appears that sector-specialist funds generally outperform generalist funds in terms of cash-on-cash metrics. However, data over the decade shows that larger funds can deliver higher returns with a sector-agnostic strategy.

This could be because larger funds are able to support more teams, enabling them to develop a deeper understanding of portfolio companies. Such GPs can also manage both sector-specialist and generalist funds based on changing market dynamics and investment mandates. However, smaller funds generally seem to perform better with a specialized approach.

For more insight into fund performance, explore Preqin’s free private market benchmarks.

_{The opinions and facts included in the above do not constitute investment advice. Professional advice should be sought before making any investment or other decisions. Preqin accepts no liability for any decisions taken in relation to the above.}