Private Equity Performance Measurement Unwrapped: A Primer Abstract

Private Equity Performance Measurement Unwrapped: A Primer

Abstract:

It is well known that performance measurement in Private Markets is a challenging task mainly because of the irregular timing and size of cash flows of private equity funds. When trying to compare different PE funds, benchmark them against public
markets, or other asset classes with a view to multi-asset portfolio allocation, popular metrics, like IRR, show key shortcomings, leading to biased results. IRR, in particular, reflects GPs’ perspective and we continue to be surprised whenever we see LPs buying into it. What this perspective does not incorporate is how much capital, when and for how long the capital itself is invested. Additional metrics like MOIC, TPVIs or PMEs have been developed and have gained popularity but they also carry several issues. Although the main scope of this article is to focus on private equity performance measurement, similar conclusions can be drawn when analysing other illiquid investments with irregular cash flows patterns, i.e. capital calls and distributions.

In this full article, we will dive into some of the most widely used performance measures and their limitations, suggesting some alternatives that can overcome the existing flaws of the metrics currently in use. The adoption of more advanced and accurate measures of performance can have many benefits and uses for both LPs and GPs. We share the conclusion of a recent research paper from INSEAD1 “As the market is maturing, there is hope that more sophisticated measures may become standard. It is up to LPs, as multi-asset class investors, to promote and request them.”

Keywords: Private Equity, Private Markets, Secondaries, Evergreen, Liquidity Solutions, Alternatives.