The Exception That Tests the Rule
The near-universal finding that past performance does not predict future performance applies most clearly to publicly traded markets — equities, bonds, and similar instruments. Private equity (PE) is the significant and well-documented exception. Kaplan and Schoar's 2005 paper "Private Equity Performance: Returns, Persistence, and Capital Flows," published in the Journal of Finance, found that PE fund managers who outperform in one fund are more likely to outperform in their subsequent fund — a degree of persistence that simply does not exist in public equity mutual funds.
Why Private Equity Might Be Different
Several structural features of private equity create conditions where persistent skill is plausible:
Illiquidity and time horizon: PE funds lock up capital for 10-12 years. This forces a long-term perspective that is genuinely different from the quarterly-benchmarking pressures on public equity managers. Illiquid investments may carry a structural risk premium — investors demand higher expected returns for accepting the inability to exit — but the best PE managers also appear to earn returns beyond this pure illiquidity premium.
Information asymmetry: private companies do not file quarterly earnings reports, are not covered by sell-side analysts, and have no continuous public price. A PE firm with deep sector expertise, management relationships, and operational experience has genuine informational and capability advantages over competitors — advantages that do not exist to the same degree in public markets where information is near-symmetrical.
Operational improvement: leading PE firms do not simply buy and hold. They restructure management, implement operational improvements, reduce costs, and support strategic repositioning. These operational capabilities — proprietary to a specific firm — are a genuine source of alpha that can persist across funds.
Proprietary deal flow: top-tier PE firms — KKR, Blackstone, Apollo, Carlyle — have reputational advantages that allow them to see deals before they become competitive auctions. This proprietary deal flow is itself a durable competitive advantage.
Caveats and Honest Limitations
The evidence for PE skill persistence, while real, comes with important qualifications:
Access is highly restricted: top-quartile PE funds — where the persistence evidence is strongest — are typically accessible only to large institutional investors (university endowments, sovereign wealth funds, large pension funds) and ultra-high-net-worth individuals. Retail investors accessing PE through listed vehicles or funds-of-funds face an additional layer of costs and typically do not access the top-tier managers.
Dispersion is enormous: unlike public equity where the difference between top-quartile and bottom-quartile active fund performance is measured in a few percentage points per year, PE return dispersion across managers is very wide. Bottom-quartile PE funds can meaningfully underperform public equity markets after fees. Getting manager selection wrong in PE is far more costly than in public markets.
The premium has compressed: as PE has grown from a niche asset class to a multi-trillion-dollar industry, the return premium over public equity has narrowed. Phalippou and Gottschalg (2009) found that once fees and risk adjustments were properly applied, many PE funds delivered less impressive returns than headline numbers suggested. Competition for deals has intensified, purchase price multiples have risen, and the easy operational improvements have been competed away.
Measurement challenges: PE returns are reported using internal rate of return (IRR), which is highly sensitive to the timing of cash flows and can be manipulated through the timing of distributions. Cross-fund comparisons are complex and require careful methodology.