Private Equity Benchmarking for Asset Owners and Investment Managers

Abstract

This works focuses on the challenges posed by benchmarking private equity performance and the solutions that have evolved in practice. The paper puts the practical approaches used by investors into four general categories, and describes the relevant characteristics that distinguish each category, the typical circumstances in which they normally arise, and the areas in which each presents opportunities for improvement. The authors’ perspective is neutral as to which method is preferred or superior, recognizing that each one presents particular advantages and challenges. The intent is to demonstrate the relationship among the different approaches that eventually should rest on similar underlying principles of objectivity, efficiency, and transparency. The intended audience includes institutional asset owners with significant allocations to private equity, that need to adequately measure the value added to their portfolio by direct and fund investment, as well as investment managers who need to track how the performance of their strategies and implementations compares to that of their peers.

TOPICS: Private equity, performance measurement

Key Findings

• ▪ Analyze the ways the investment industry has evolved to tackle the challenges with private equity benchmarking in practice.

• ▪ Reduce the reliance on subjective measures like appraisal values and heuristic groupings, and focus on objective measures like cash flows, transacted values, and efficient benchmark portfolios.

• ▪ Evolve beyond static measures of performance to those that suggest the confidence intervals that differentiate between skill and luck.