The Power of Selection: Manager Due Diligence and Venture Capital’s Long Game in Private Markets
Introduction
Endowment and foundation Chief Investment Officers (CIOs) operate with an enviably long investment horizon. These investors measure success not in quarters or years, but in decades. With 20, 30, even 50-year horizons in mind, their forays into private markets, particularly North American venture capital, demand a steadfast focus on manager selection and due diligence.
In an era where passive index investing dominates public markets, private markets stand apart: there is no “index” to buy in venture capital (yet). Every allocation is an active bet on a manager, making the choice of fund and general partner (GP) paramount to long-run performance. According to recent PitchBook research, which corroborates long standing and widely accepted manager selection research industry-wide, the dispersion of outcomes among private funds is dramatically wider than in public markets. This commentary examines how that dispersion translates into risk and opportunity for long-horizon allocators, and why skilled manager selection backed by rigorous due diligence is the linchpin of enduring portfolio success in venture capital.
The Long View: Private Market Performance Over Decades
Private markets have delivered strong absolute returns over the long term, but the advantage over public equities can be thin unless one accesses top-tier managers. PitchBook’s Q1 2025 Benchmarks show that over a 20-year horizon (ending Q1 2025), North American venture capital funds achieved roughly a 10.6% pooled annual IRR, only marginally above the S&P 500’s ~10.2% CAGR over the same period. In contrast, buyout funds (the large-cap “private equity” strategies) significantly outperformed public markets with ~14.1% 20-year IRRs. In other words, the average venture portfolio has barely beaten public equities net of fees, raising the question: why bother with illiquidity and complexity if one could just hold stocks? The answer lies in the outliers – those top-performing venture funds that drive the asset class’s reputation for outsized gains. Over 15-year and 10-year spans, venture capital returns have been respectable (low-to-mid teens IRRs) but still in the same ballpark as public small-cap stocks. Only by capturing the upper end of the venture distribution can CIOs expect to generate true excess returns over long timeframes.
Historical data underscore how vintage year cycles can sway outcomes. The early 2000s, the post-dotcom era, were brutal for venture capital: for example, North American VC funds from vintage 2002 earned a pooled IRR of just ~1.2%, underperforming public benchmarks by nearly 5 percentage points. In contrast, 2007 vintage VC funds realized ~15% IRRs, outperforming the S&P 500 by over 3% annually. PitchBook’s data also indicate that simply adding a generic allocation to private markets is no guarantee of superior performance. A recent PitchBook simulation found that a 20% venture allocation chosen at random would have underperformed a public equity portfolio (5.7% vs 6.9% annual returns since 2000). In other words, venture capital is not an automatic win for the long-term investor – skill and selectivity make the difference between underperformance and outperformance over decades. For CIOs managing perpetual capital, this reinforces a crucial point: long-term private market success is less about market beta and more about manager alpha.
Dispersion in Venture Capital: Wide Gaps, Big Opportunities
If private markets are an acquired taste, venture capital is their strongest flavor – zesty with possibility but demanding a strong palate for risk. Performance dispersion in venture capital is the widest of any private asset class, meaning the gap between a top-tier fund and a poor performer is extreme. According to PitchBook’s benchmarks, the spread between top- and bottom-quartile venture funds can be on the order of tens of percentage points of IRR. Even in terms of simple multiples on invested capital, the differences are striking. For example, North America venture funds from the 2000 vintage (peak of the dot-com bubble) have a median total value to paid-in (TVPI) of only ~0.98x, meaning the typical fund barely returned investors’ capital after 20+ years. Yet the top-decile 2000 VC funds produced roughly 1.9x TVPI, and a few stellar funds did even better than that. On the flip side, many bottom-decile funds from that era were disasters – the bottom 10% of 2000 vintage VCs returned just ~0.3x, implying a 70% loss of capital. This enormous spread is far beyond anything seen in public equity indices and highlights that which manager / fund you back is a critical determinant of outcome.
The pattern repeats in later vintages. Consider 2012 vintage venture funds, which benefited from the post-GFC innovation wave and long bull market. The median 2012 VC fund has a 2.7x TVPI, a strong result turning $1 into $2.70 net of fees. But top performers completely reset the scale: top-decile 2012 funds delivered around 7.3x TVPI – turning $1 into over $7 – while bottom-decile funds managed only ~1.2x (barely above break-even). In other words, an LP who backed a top 10% manager (VC firm) in 2012 earned six times more than one who backed a bottom 10% fund from the same vintage. PitchBook’s research explicitly notes that the payoff for skilled manager selection is largest in venture capital (and buyouts) because of this wide dispersion. The data makes a compelling case: in venture portfolios, the winners drive the averages, and avoiding the losers is as important as finding the winners. For a long-horizon investor, securing allocation to even a few of those top-quartile funds can tilt the performance of the entire portfolio upward for decades.
Crucially, outperformance in venture capital is not just about catching a single star fund. It’s about consistency across many vintage cycles. Endowments and foundations allocate to venture funds vintage after vintage, aiming to build a pipeline of innovation exposure. With such a program, the cumulative effect of always being in the top quartile (or missing it) compounds dramatically over 30 or 50-year spans. For instance, if one could consistently earn 3% higher annual returns in venture through superior manager selection, that differential would compound to enormous lead over decades. (An extra +0.5% on total portfolio returns can translate to 15% more capital after 30 years by our estimates, and even more over 50 years – a potentially game-changing advantage for an endowment.) According to PitchBook’s analysis, even a moderate level of manager selection skill – tilting slightly toward better funds – could add 20–60 bps to annual total portfolio returns, or roughly 100–300 bps of alpha per year within the private allocation. In practical terms, that is the difference between a good 7% return and a great 10%+ venture return, an edge that over multiple decades separates top-performing institutions from the rest.
Due Diligence, Persistence, and the Human Factor
Achieving those coveted top-quartile results is neither easy nor automatic. It requires exceptional due diligence and often a bit of foresight to identify managers who will outperform. A common misconception in venture investing is that past performance guarantees future success, given narratives about famed VC firms with serial home runs. However, PitchBook’s research suggests that performance persistence in private funds has weakened when you account for the timing of decisions; the old leaders aren’t guaranteed to be the future winners. In fact, solely chasing yesterday’s top performers can disappoint. As one PitchBook study found, investors cannot rely on outperformance persistence alone and must “look beyond past performance when undertaking manager due diligence”. In practice, this means CIOs need to scrutinize how a manager generated past returns (was it one lucky unicorn investment or a repeatable process?), assess the stability and depth of the investment team, evaluate strategy drift, and gauge whether a GP’s competitive edge is sustainable in current market conditions.
Thorough due diligence has always been the hallmark of successful private investing, but its importance compounds over long horizons. In venture capital, where fund return distributions are skewed (a few deals often drive the outcome) understanding a manager’s sourcing, value-add, and portfolio construction philosophy can reveal whether they have the discipline to repeatedly hit winners and avoid losers. It’s also where qualitative factors, like culture and network, become quantitative in impact. Skilled manager selection often boils down to a mix of quantitative analysis (track record metrics, PME (public market equivalent) benchmarks, loss ratios) and qualitative judgment (leadership, team incentives, investment thesis). When done right, this intensive selection effort pays off. PitchBook’s Q4 2025 “Manager Selection Alpha” report quantified this: in a scenario of high selection skill, where an LP consistently leans into top-quartile managers, the private portfolio’s alpha can reach ~300 bps annually relative to a random selection. Even a scenario of simply avoiding the bottom-half funds yields meaningful improvement. This is evidence that manager selection is alpha generation in private markets, an opportunity to create value above market benchmarks through intentional effort.
That said, CIOs must also be realistic about the costs and challenges. Accessing top venture firms is notoriously difficult (capacity is limited and coveted), and performing deep due diligence across a broad manager universe demands resources like skilled staff, data tools, and often the willingness to say “no” far more often than “yes.” The research cautions that the potential alpha must be weighed against the “realistic levels of skill and the cost of achieving it”. In other words, pursuing a strategy of all top-quartile managers might require significant organizational commitment; building relationships, possibly paying higher fees or accepting tougher terms, and enduring dry spells when even good managers have off vintages. The good news for long-term investors is that they can afford to make these investments in time and patience either through the use of partners (consultants) or in a hybrid format, outsourcing certain aspects of the process and maintaining other aspects in house. Endowments and foundations, with their multi-decade outlook and evergreen capital, are ideally positioned to leverage this critical source of potential alpha-generation. They can also, either through partner relationships or self-driven efforts, cultivate top-tier manager portfolios, monitor them over cycles, and capitalize on the power of compounding when those managers deliver outsized gains.
Strategic Implications for Endowment & Foundation CIOs
For CIOs focused on long-term private capital allocations, these findings drive home a clear strategic mandate: alpha in private markets is there for the taking, but it must be earned through skillful manager selection and disciplined due diligence. Simply allocating to venture capital or private equity is not enough; one must allocate well. Below we outline key takeaways and actions that CIOs of endowments and foundations should consider:
Prioritize Manager Selection as a Core Skill: Make manager selection a centerpiece of your investment strategy. The data show that in venture capital, top-quartile funds vastly outperform median funds – e.g. delivering 4–7x multiples versus ~2x for the average. Identifying and accessing those top-tier managers is essential to justify private market allocations. This may involve engaging a consulting partner and devoting more team resources to due diligence, expanding GP networks, and building relationships early with emerging managers who could be tomorrow’s leaders.
Set Realistic Performance Expectations: Use historical benchmarks (IRRs, PMEs, and multiples) to ground return expectations in reality. According to PitchBook, the median VC fund over 20 years produced ~10% IRR, roughly on par with public equities[2]. Thus, a policy assumption that “private equity = 15% returns” without regard to manager quality is misguided. Instead, set a base case assuming median-like outcomes, and view skillful manager selection as the path to exceed that base case. Public Market Equivalent (PME) metrics can help evaluate whether a private fund truly added value over a stock index – use them in diligence and in reporting to stakeholders to illustrate the value of selection.
Embrace Dispersion – Diversify and Concentrate: The wide dispersion in venture capital means that a few big winners can drive portfolio returns. CIOs should ensure they have enough shots on goal (vintage diversification and number of fund relationships) to capture those winners, but also concentrate capital in the highest-conviction managers once identified. It is better to be meaningfully invested with a handful of consistently top-quartile GPs than over-diversified across dozens of “average” funds. As the volumes of research imply, avoiding the worst performers is as important as finding the best, so maintain discipline in cutting loose underperforming managers and reallocating to stronger hands.
Invest in Due Diligence and Manager Development: Given that past performance is an imperfect guide in private markets, CIOs must dig deeper. Either engage expert consulting resources to do this on your behalf or directly perform forward-looking due diligence: assess how a manager’s strategy fits the current environment, and whether they have an edge that can persist. Build internal processes that capture qualitative insights (e.g. reference calls, team interviews) alongside quantitative analyses (e.g. track record evaluation, loss ratio, TVPI vs DPI profiles). Consider seed funding new managers or spin-outs with promise – an early relationship can secure capacity in a future top performer. Over decades, some of your initial bets on rising talent can become cornerstone positions in the portfolio.
Leverage the Long Horizon: Finally, take advantage of the fact that endowments and foundations don’t have to chase short-term results. A 50-year horizon (or more) means you can commit to a superior manager through multiple fund cycles, enjoying the compounding of their outperformance. It also means you can endure periods of market dislocation (or a dry spell in VC returns) without abandoning the strategy. As PitchBook’s simulation showed, just a 0.2%–0.6% annual boost to a total portfolio return from private market skill can compound significantly over time. Long-term CIOs should therefore focus on process and consistency, by institutionalizing manager selection excellence, the incremental gains each year will accumulate into a sizable legacy of alpha.
Conclusion
In the realm of venture capital and private markets, the cliché “it’s a stock picker’s market” rings true, except here it’s a “fund picker’s market.” Endowment and foundation CIOs, charged with stewarding capital for generations, must view manager selection and due diligence not as routine checkboxes, but as their chief source of competitive advantage. North American private market data, as illuminated by PitchBook’s research, makes the case plainly: the difference between mediocrity and excellence in 20 or 50-year outcomes comes down to choosing the right partners. Expert led skilled selection is the engine that converts the illiquidity, risk, and uncertainty of venture investing into meaningful long-term alpha. By rigorously vetting managers, actively curating the portfolio, and leaning into the unique strengths of a long horizon, CIOs can turn the wide dispersion of venture capital to their favor. The charge is clear: in venture investing, who you invest with is just as important as what you invest in, and over the next half-century, those decisions will echo louder than ever in the fortunes of institutional portfolios.
Sources:
Pitchbook: Q4_2025_Allocator_Solutions_How_Much_Alpha_Is_There_in_Private_Markets
Pitchbook: Q1_2025_Benchmarks_with_preliminary_Q2_2025_data_North_America
Pitchbook: Q4_2025_Allocator_Solutions_How_Much_Alpha_Is_There_in_Private_Markets