Past Performance Is Not An Indicator Of Future Results

“My performance speaks for itself” -- this phrase makes me cringe.

GPs have been conditioned by LPs to think that performance is all that matters. If you’re an existing investor, performance is the way you measure outcomes and if a manager meets your expectations (on an absolute basis, NOT based on which quartile of a random blinded incomplete universe ‘benchmark’ happens to fall). Though, by itself, it is an empty number. Was it luck, was it skill, is it repeatable? If it is an eye-popping number, it tells me that 𝑠𝑜𝑚𝑒𝑡ℎ𝑖𝑛𝑔 worked in the past. It’s incumbent on me as the LP to 𝐧𝐨𝐭 take that number as gospel, but to dig into it to discern if its source is repeatable and systematic, to provide insight into the future.

In reality, the GP’s historical performance doesn’t speak at all in a way that is relevant to my assessment of a GP’s ability to generate returns in the future.

Here’s a fitting example. I met with 11 GPs this week (which is a pretty standard week). Some updates, some net new. We discussed portfolio, strategy, the market, and performance across prior funds, all the things you would expect. Each had a good story, a reason to exist and interesting portfolio companies. One firm had a track record with a 5x fund earlier in its life, and one of the emerging firms had their first fund still marked below cost. What was striking about this is, after talking to both, the latter, the one where the performance is ‘3rd or 4th quartile’ or ‘underwhelming’, is the one I would have more confidence in to generate better future performance.

But why? Some LPs would see that number and run the other way. But performance is a single number that provides no context or color. When we dug into the portfolio, three portfolio companies were impaired because of exogenous events outside the GP’s control. It wasn’t a bad company or a lack of diligence; it was simply bad luck. The other challenge is that many of the remaining portfolio companies are doing well and have not needed to raise more capital, so they are still marked at cost or near-cost. It doesn’t help that headline number that many LPs use as a sole determinant of good and bad. However, when you do dig in, you realize that number doesn’t tell the story, and it doesn’t speak for itself. It actually tells a much different story than what you’ll find if you spend the time understanding.

Still, many allocators lean on performance as an ‘objective’ way to identify what is good and not. As a GP raising capital now, my advice is to share fund level performance with as much visible context around it. What did you do well, what did you learn, what would you do differently, what was luck or what you can say is repeatable.

After all, past performance is not an indicator of future results, but how those results were generated can be.