Why Your PE Fund's "Top Quartile" Ranking Might Be Meaningless

Fund performance doesn't happen in a vacuum. Macro conditions - interest rates, valuations, liquidity - shift drastically over time. A fund raised during a bull market faces a very different reality than one launched before a crash. Without adjusting for that context, you risk praising mediocrity or punishing excellence.

The Smarter Benchmark: Vintage Year

A vintage year groups funds that began investing around the same time. This approach makes sense because it means comparing funds that faced:

• The same economic backdrop - bull markets, recessions, and everything in between
• The same credit environment - tight lending standards or easy money
• The same deal flow and valuations - frothy markets or distressed opportunities

Vintage benchmarking levels the playing field. It isolates manager performance from market luck, giving you a clearer picture of who actually delivered alpha versus who just rode the wave.

Example: When 12% IRR ≠ 12% IRR

Let's say a GP reports a 12% net IRR. Is that good? The answer depends entirely on context:

• For a 2005 fund (median ~6.7%): ⭐ Stellar performance
• For a 2015 fund (median ~15.5%): 👎 Underwhelming results

The same number tells two completely different stories. Context transforms mediocrity into excellence, or excellence into disappointment.

A Tale of Two Vintages

The contrast between 2005-2006 and 2015-2016 vintages perfectly illustrates why vintage year matters:

The 2005-2006 Vintage:These funds were raised before the Global Financial Crisis and invested into peak valuations. They got hit by the credit freeze and economic downturn that followed. The numbers reflect this challenging environment:

• Median net IRRs: ~7.7%
• Top quartile: ~11%
• Median TVPI: ~1.56x

The 2015-2016 Vintage:These funds were raised in a near-zero rate world and invested during a prolonged bull market. They benefited from rising valuations, cheap debt, and a frothy IPO market:

• Median net IRRs: mid-to-high teens
• Top quartile: >20%
• Median TVPI: ~2.0x

Same industry, totally different conditions. Comparing these vintages directly would be like comparing a swimmer's performance in calm waters versus a hurricane.

Why Vintage Benchmarking Beats the Average

Generic "all-time" metrics blur crucial distinctions in several ways:

• They mix crisis-era funds with bull market funds - creating meaningless averages
• They confuse LPs about true outperformance - making lucky timing look like skill
• They fail to reflect risk, timing, and economic headwinds - ignoring the context that shaped results

Vintage benchmarks show whether a manager outperformed their peers under the same conditions. That's the only fair comparison.

What Smart LPs Do

Ask this question every time: "Compared to what?" When a GP shares performance metrics, dig deeper:

• Get the fund's vintage year - when did they start investing?
• Compare IRR and TVPI to that cohort's medians - how did they stack up against peers?
• Use tools like FundFrame to access vintage-specific benchmarks and avoid misleading comparisons

This approach helps you spot real alpha instead of getting fooled by market timing.

The Bottom Line

All IRRs are not created equal. A strong return in 2006 could be weak in 2016. Don't be fooled by top-line stats that ignore the economic environment that shaped those results.

Vintage year benchmarking is the only way to measure skill—not just circumstance. Just like with wine, in private equity: vintage really does matter.