Smaller Private Equity Funds Outperform Larger Counterparts, New Analysis Suggests

A recent article by Nic Millikan, Managing Director of Investments at Allocate, titled "Bigger Isn’t Always Better," challenges the conventional wisdom that larger private equity funds inherently lead to superior returns. The piece, shared by prominent venture capitalist Trace Cohen on social media, delves into the nuanced relationship between fund size and performance within the private markets, suggesting that smaller, more agile funds may offer distinct advantages.

Nic Millikan, a seasoned expert in alternative investments with a background at firms like BlackRock and CAIS, argues that while larger funds command significant capital and can undertake bigger deals, their sheer size can also introduce inefficiencies and dilute returns. The article likely highlights that smaller funds often exhibit greater flexibility, allowing them to pursue niche strategies, invest in less competitive segments of the market, and engage more intimately with portfolio companies. This hands-on approach can lead to more significant value creation and, consequently, higher net returns for investors.

Industry analysis frequently points to a potential inverse relationship between private equity fund size and performance, particularly in certain market cycles. Smaller funds, typically below a certain asset under management (AUM) threshold, are often cited for their ability to generate higher internal rates of return (IRRs) compared to their mega-fund counterparts. This phenomenon is attributed to factors such as access to a broader universe of investment opportunities, including smaller, overlooked companies with higher growth potential, and the capacity for more focused operational improvements.

Trace Cohen, a co-founder and General Partner at Six Point Ventures and an active angel investor in early-stage startups, endorsed the article, underscoring its relevance to the broader investment community. Cohen's interest in the topic reflects a growing recognition within venture capital and private equity circles that optimizing for size alone may not align with maximizing investor value. The discussion initiated by Millikan's article encourages a re-evaluation of investment strategies, advocating for a focus on qualitative factors and strategic agility over mere scale.

The insights from "Bigger Isn’t Always Better" contribute to an ongoing dialogue in the private markets about the optimal fund structure and investment philosophy. It suggests that investors should look beyond the headline figures of large funds and consider the potential for outperformance offered by more specialized and nimble investment vehicles.