The ‘Hero Deal’ Illusion: Lee McCabe on Private Equity Fund Performance

In a recent LinkedIn post, Lee McCabe critically examines the common presentation of private equity fund performance, arguing that the focus on a single “hero deal” obscures the reality of a fund’s overall success and the prevalence of underperforming investments.

McCabe highlights a pervasive pattern in fund decks, where one standout investment is prominently featured while the less successful ventures are omitted. He states:

“Every fund deck has one hero deal and three missing bodies. Every private equity fund deck has the same case study. One beautiful winner. 5x return. Perfect timing. Clear thesis. Operational improvement. Disciplined execution. Everybody involved looking like a cross between Warren Buffett and a Navy SEAL.”

The author points out that this selective storytelling creates a skewed perception of repeatability and success within the private equity industry. According to McCabe, the wins are often attributed to the firm’s process and skill, while the losses are conveniently blamed on external market conditions.

Deconstructing the “Hero Deal” Narrative

Lee McCabe argues that this approach distorts the true picture of a private equity firm’s capabilities. He questions the consistency of methodologies that produce both exceptional returns and significant underperformance within the same fund.

“The winner becomes evidence of the firm’s process. The losers become market conditions. The case study is always the one where the thesis played out. The one where the thesis did not play out gets redescribed as a learning.”

McCabe suggests that the underlying reality is far more complex, involving a combination of factors beyond just skill.

The Uncomfortable Truths of Private Equity

As McCabe elaborates, the success of a fund is not solely about identifying and executing a single winning investment. He posits that luck and timing play significant roles, and that even well-regarded firms can make investments that fail to deliver substantial returns.

“And nobody ever explains how the same firm, the same process, the same diligence approach, the same IC, the same operating team, can produce a 5x and a 0.8x in the same vintage year using the same methodology. Because the honest answer is uncomfortable. Some of it is skill. Some of it is timing. Some of it is luck.”

The author emphasizes that true insight into a private equity firm’s competence comes from examining the full spectrum of its investments, not just the highlights. He asserts that the real value lies in understanding the complete distribution of returns.

The Importance of the Full Distribution

McCabe challenges the industry’s tendency to focus on the exceptional rather than the average or the underperforming. He believes that investors and stakeholders should demand a more comprehensive view of a fund’s track record.

“The interesting question is never whether a firm has one great deal. Most decent firms do. The real question is what the full distribution looks like. How many misses. How many stalls. How many capital intensive clean ups disguised as hold extensions. How many assets that only look acceptable because the winner is doing all the reputational heavy lifting.”

In Lee McCabe’s view, a firm’s ability to consistently manage a portfolio, including its less successful investments, is a more accurate indicator of its long-term capabilities than the visibility of a single, high-profile success. He concludes that the entirety of a fund’s performance, not just its brightest moments, is what truly reveals whether a firm knows what it is doing.