We all know that efficient markets and random walks mean that past financial performance is no predictor of future results. Or do we? Because while that “rule” holds in mutual funds and public equities, it hasn’t held in venture capital and private equity broadly.
The top-performing venture funds tends to remain the top-performing funds. One recent study (Kaplan & Schoar 2003) showed that a 1% increase in current fund performance was associated with a 54-basis-point performance improvement in fund N+1. Longer levels of higher performance were associated with even higher future fund performance.
So, does this invalidate orthodox efficient market theory? Of course not. It merely shows that inefficient markets — which private equity has certainly been, at least historically — are places where skill and effort are rewarded.
Will private equity continue to show serial performance peristence in the face of dauntingly high cash in-flows over the past decade? Now there is an open question, one to which I suspect the answer is yes, but it’s by no means certain.