A few weeks ago, I argued that picking a winning active mutual fund is harder than it looks, and investors can incur hefty opportunity costs when they get it wrong. In this article, I thought I’d revisit that subject, this time focusing on private equity and venture capital funds.

Unlike mutual funds, where the differences in long-term returns can be relatively narrow, private equity and venture capital funds have seen a wide performance spread. To illustrate, here’s the difference in internal rates of return between funds of various types at the 25th and 75th percentiles based on PitchBook benchmark data.

While the spread was narrower for private debt strategies, there was routinely a 10-percentage-point-plus difference in the annual IRRs of leading and lagging private equity, venture capital, and private real estate funds.

What explains this big spread, and what implications does it have for investors, especially those who might be considering making their first foray into funds that invest in private markets?

Staying Alive

One reason you see wider variation in private equity fund returns is that such funds live longer than the typical public fund does. (Though private funds have a limited life by design and open-end funds have unlimited lives, the median open-end fund doesn’t live more than a decade.)

That longevity is explained by a few factors. First, these funds lock up the capital investors entrust to them, which mitigates the viability risk that other funds like mutual funds can face if they fail to gather assets. In addition, it can take years for private equity funds to call committed capital from their investors and allocate it, and even longer for them to sell off the investments they’ve made and share the proceeds before winding down.

What that means is the dud private equity funds don’t perish after a few years like an open-end fund might following tepid demand or a spate of outflows. They cannot just sell their investments on the open market and close up shop. They must find an exit for their holdings before they can shut down. Poorly performing private equity funds thus remain in the benchmarks until the end. This yields a wider range of outcomes over longer periods than is typical in universes like mutual funds, where underperforming vehicles often die.

Investors intrigued by the wide variation of private equity fund returns—and the prospect of hitting pay dirt if they can pick a winning manager—should keep in mind that the wide spread reflects not just differences in manager quality, but also the somewhat irrevocable nature of these types of investments. That is, once you’re in, you’re on the hook for years and so the trade-off for that high potential payoff is having to stick with it through thick and possibly thin, knowing that in the interim at least some of the returns are paper only and won’t be fully realized until the fund eventually finds buyers for its holdings.

Apples to Apples?

In addition, the private equity and venture capital universes can be quite diverse. A broad index of such funds could therefore be prone to commingling different styles, with those differences explaining a portion of the return dispersion observed.

For instance, if you were to control for stage (that is, early- versus late-stage venture capital), sector specialty (tech/growth versus industrial roll-up), or geographical focus (emerging markets versus US/Western Europe), you might find that the range of returns is far narrower than a broad measure of dispersion might suggest at first glance.

To put this in perspective, if we were to simply compare the returns of all diversified equity mutual funds to each other, irrespective of style, the returns dispersion would have been around 4.3 percentage points per year over the decade ended May 31, 2025. That’s far wider than what we saw when we compared stock funds with other stock funds within the same Morningstar Category.

The same concept almost certainly holds for private equity and venture capital funds. Given that, an investor marveling at a manager’s top-quartile returns would probably be well-advised to consider whether that performance owed at least partly to certain attributes that might or might not be consistent with what’s being sought or durable enough to confer future outperformance.

Beyond that, it’s important to keep in mind that while there’s some evidence of persistence in manager performance, every new fund that’s raised is essentially a blank slate. That can call the replicability of past returns into question, putting an even higher premium on manager selection that’s not reliant on a track record.

Beyond the Velvet Rope

Last, there’s the matter of accessibility. You might covet a top-quartile return from, say, a venture capital fund. But that doesn’t mean you can get it, as some of the top funds might be oversubscribed or impose conditions like lofty investment minimums that put them well out of a retail or high-net-worth investor’s reach. Given that there’s some evidence of performance persistence among the most successful funds, especially in venture capital, this can put the best returns off limits, narrowing the range of potential outcomes.

You can get a sense of this trade-off—gaining access at the cost of potential upside—by examining the dispersion of private equity and venture capital fund-of-funds returns and comparing that against the performance dispersion of the private equity and venture capital funds themselves. I’ve used PitchBook data to draw that comparison below.

What you find is that there is a much narrower dispersion of returns among funds of funds than the funds themselves.

That’s notable considering that funds of funds can be an outlet for investors lacking the resources to allocate to the top-shelf, hard-to-access private equity and venture capital funds. Thus, it’s arguably a better proxy for what the potential range of returns might look like for those who are newer to the space or lack the scale and pedigree to access the best managers.

That doesn’t foreclose the possibility of earning an excellent return in a fund of funds, one that rivals the performance of the best private equity or venture capital funds themselves or, conversely, of suffering a very poor outcome. But because these strategies typically spread their assets across multiple underlying funds to diversify, it makes it likelier they’ll earn a return closer to the median private equity fund’s and less likely they’ll rank among the very best or worst.

What About “Evergreen” Funds?

On a somewhat related point, it’s possible that “evergreen” vehicles like interval funds and tender-offer funds will become an important gateway for high-net-worth investors to access private markets. While the sample size there is still quite small, as time goes on and more of these vehicles launch, we’ll learn more about the dispersion of returns among these funds.

In the meantime, it’s probably reasonable to expect a narrower return spread for a few reasons. For one, evergreen funds might not be able to access the top managers and deals or be reliant on funds of funds, which are likelier to diversify their assets widely. That could trim the tails of the distribution.

In addition, they’re also likelier to spread their assets widely across vintages and deal types, as this helps to smooth returns and ensure the fund is liquid enough to meet redemptions (which are typically permitted up to a limit). That would suggest fewer concentrated bets and less weight in highly illiquid or cyclical strategies, which in turn lowers the likelihood of outlier returns.

Conclusion

While we can probably say that the potential payoff to choosing the right private equity or venture capital fund exceeds that of picking the right active mutual fund, it’s less clear whether that will accrue to a newer investor’s benefit.

To approach it in the most clear-eyed way, it’s worthwhile to consider the less revocable nature of investing in private funds (notwithstanding the rise of secondary markets in such funds as well as semiliquid vehicles like interval funds), the potential for differences in fund attributes to drive performance, and the likely range of outcomes among the vehicles to which they’ll realistically have access.

PitchBook’s Hilary Wiek contributed to this article.

Switched On

Here are other things I’m reading, listening to, or watching:

• Christine Benz on how to navigate the complexity of managing for a long-term care need
• Amy Arnott on whether it’s too late to add to your international equity stake
• ARK filed for some new buffer exchange-traded funds that will (I think?) seek to capture all but 5% of the upside while avoiding half the downside
• Tom Brakke with another excellent roundup of happenings in the investment and wealth management business
• The Money Stuff podcast talks about how Vanguard (indirectly) owns a lot of crypto
• Ryan Russillo discusses the genius and sorrow of Mark Twain with author Ron Chernow
• A movie ahead of its time: “War Games”

Don’t Be a Stranger

I love hearing from you. Have some feedback? An angle for an article? Email me at jeffrey.ptak@morningstar.com. If you’re so inclined, you can also follow me on Twitter/X at @syouth1, and I do some odds-and-ends writing on a Substack called Basis Pointing.