Academics and Private Equity Professionals Discuss Private Equity Performance

How do we accurately assess the performance of private equity investments? Last month, leading academics and industry practitioners gathered for the Private Equity Research Consortium’s Fall 2011 Conference at the University of North Carolina, Chapel Hill (UNC) to discuss the challenges of measuring the performance of private equity funds. The Consortium includes academics from UNC, as well as University of Chicago, University of Virginia and Duke University. The aim of the Consortium is to better understand trends in private equity performance and to encourage academic research in this area.

Main themes of the two-day session – attended by the PEGCC’s Vice President of Research Bronwyn Bailey – included: comparing data published by benchmark providers, weighing private equity performance against public markets, and incorporating the measurement of risk in the analysis of returns.

The presentations included a discussion about a recent paper by Robert Harris, Tim Jenkinson and Steven Kaplan examining the leading private equity benchmark providers. The paper finds consistency in the average IRR values published by Cambridge Associates, Preqin and the Burgiss Group for buyout funds during the 1990s and 2000s, even though these datasets contain very different sample sizes and selection criteria. To understand the relative performance of private equity, the authors utilize a public market equivalent (PME) to compare cash-on-cash returns to public equities. The PME measures performance as if the capital paid in and distributions from private equity funds had instead been equivalently timed as investments in and returns from the S&P 500 Index. The findings show that median buyout funds during the past three decades (1980s, 1990s and 2000s) outperformed the S&P 500 Index, even when adjusting for cash flows.

Another prevalent theme during the conference was the measurement of risk when analyzing the performance of private equity. As an alternative asset, private equity investing by definition takes on greater risk than public securities, which makes return comparisons difficult. Industry professionals increasingly agree that a measurement of risk is necessary to assess investment performance. The PEGCC’s counterpart in Europe, the European Venture Capital Association (EVCA), has created a working group to identify the feasibility of risk measurements for the asset class, which would account for liquidity and market risk. During the conference, a panel of private equity professionals agreed that assessing risk as part of fund performance is important. However, many limited partner investors have more basic targets, such as annual rates of return required from their entire portfolio to generate the necessary liquidity to meet expenses.