CAIA - 08 - Private Equity Benchmarking

Question 1

“Benchmarks serve a number of needs: 1. Assist with the ___ ___ ___ process. 2. ___ or ___ ___for the performance of an asset 3. Standard for managers to compare their performance against for ___ 4. Providing managers the right ___.”

Answer 1

“Benchmarks serve a number of needs: 1. Assist with the strategic asset allocation process. 2. Standard or point reference for the performance of an asset 3. Standard for managers to compare their performance against for marketing 4. Providing managers the right incentives.”

Question 2

“There are a number of steps involved with constructing and using a benchmark 1. ___ a PE asset and ___its ___ 2. Selecting an ___ ___for a direct PE investment, PE fund, or a fund of funds. 3. Comparing the PE asset’s ___with that of the ___”

Answer 2

“There are a number of steps involved with constructing and using a benchmark 1. Valuing a PE asset and measuring its performance 2. Selecting an appropriate benchmark for a direct PE investment, PE fund, or a fund of funds. 3. Comparing the PE asset’s performance with that of the benchmark”

Question 3

PE is essentially an ___ ___ ___, with assets valued by professional appraisers rather than by consensus reflected in market prices.

Answer 3

PE is essentially an appraised asset class, with assets valued by professional appraisers rather than by consensus reflected in market prices.

Question 4

Due to lack of consensus on valuation and of third–party oversight, VC may suffer losses due to ___.

Answer 4

Due to lack of consensus on valuation and of third–party oversight, VC may suffer losses due to overvaluation.

Question 5

Buyout investments have ___ valuation risk than VC funds.

Answer 5

Buyout investments have less valuation risk than VC funds.

Question 6

Buyout valuations are based on ___ ___

Answer 6

Buyout valuations are based on cash flow

Question 7

The ___ is the discount rate that makes the present values of cash inflows equal to the present values of the cash outflows.

Answer 7

The IRR is the discount rate that makes the present values of cash inflows equal to the present values of the cash outflows.

Question 8

The ___–___ ___ IRR and the ___–___ IRR are considered by industry associations and the CFA institute to be the most appropriate measures of PE fund returns.

Answer 8

The cash–weighted interim IRR and the since–inception IRR are considered by industry associations and the CFA institute to be the most appropriate measures of PE fund returns.

Question 9

The ___ to ___ ___ ___or ___ ___measures cumulative distributions to investors relative to the total capital drawn from investors.

Answer 9

The distribution to paid in ratio or realized return measures cumulative distributions to investors relative to the total capital drawn from investors.

Question 10

The ___ ___to ___ ___ ___or ___ ___measures the total value of unrealized investments relative to the total capital drawn from investors in previous periods.

Answer 10

The residual value to paid in ratio or unrealized return measures the total value of unrealized investments relative to the total capital drawn from investors in previous periods.

Question 11

The ___ ___to ___–___ratio or ___ ___measures cumulative distributions to investors plus the value of unrealized portfolio investments, relative to

Answer 11

The total value to paid–in ratio or total return measures cumulative distributions to investors plus the value of unrealized portfolio investments, relative to

Question 12

Buyout funds typically generate positive returns ___ than venture capital funds.

Answer 12

Buyout funds typically generate positive returns sooner than venture capital funds.

Question 13

The NAV of a PE fund ___ in the fund’s early years and ___in later years.

Answer 13

The NAV of a PE fund decreases in the fund’s early years and increases in later years.

Question 14

There are two broad types of benchmarks:

1. ___-based benchmarks
2. ___-based benchmarks

Answer 14

There are two broad types of benchmarks:

1. Asset-based benchmarks
2. Peergroup-based benchmarks

Question 15

PE is considered an ___ return class

Answer 15

PE is considered an absolute return class

Question 16

A ___ ___index is comprised of share prices of publicly traded PE firms

Answer 16

A listed PE index is comprised of share prices of publicly traded PE firms

Question 17

Listed PE indices have ___ risk-return characteristics than non-listed PE indices.

Answer 17

Listed PE indices have different risk-return characteristics than non-listed PE indices.

Question 18

The ___ ___ ___ is an index return measure that uses market indices to reflect the opportunity cost of capital of a PE investment vis-a-vis investing in other instruments.

Answer 18

The public market equivalent is an index return measure that uses market indices to reflect the opportunity cost of capital of a PE investment vis-a-vis investing in other instruments.

Question 19

The most intuitive form of benchmarking for PE funds is to compare a PE fund to a ___.

Answer 19

The most intuitive form of benchmarking for PE funds is to compare a PE fund to a peergroup.

Question 20

A benchmark commonly used for PE is a ___-___ ___, which is a group of PE funds with similar traits.

Answer 20

A benchmark commonly used for PE is a peer-group cohort, which is a group of PE funds with similar traits.

Question 21

PE fund databases suffer from a number of shortcomings:

1. PE investors ___ provide data
2. Databases do not ___ ___the ___
3. The quality of data is ___ and generally ___
4. Databases that include data from PE funds of funds may ___ ___data
5. Data related to ___and ___ ___are often excluded or incorrectly classified.

Answer 21

PE fund databases suffer from a number of shortcomings:

1. PE investors voluntarily provide data
2. Databases do not fully represent the market
3. The quality of data is inconsistent and generally poor
4. Databases that include data from PE funds of funds may double count data
5. Data related to innovations and emerging markets are often excluded or incorrectly classified.

Question 22

Some traits of peergroups present challenges:

1. Peergroup ___ are not known
2. Peergroups are not ___

Answer 22

Some traits of peergroups present challenges:

1. Peergroup populations are not known
2. Peergroups are not investible

Question 23

Publicly available databases are subject to biases, which reflect PE’s lack of transparency:

1. ___ bias
2. ___pricing
3. ___ ___bias
4. ___bias
5. ___bias

Answer 23

Publicly available databases are subject to biases, which reflect PE’s lack of transparency:

1. Valuation bias
2. Stale pricing
3. Instant history bias
4. Selection bias
5. Survivorship bias

Question 24

___ ___ bias occurs when database providers add return data to their databases that correspond to a PE fund’s incubation period.

Answer 24

Instant history bias occurs when database providers add return data to their databases that correspond to a PE fund’s incubation period.

Question 25

\_\_\_ bias refers to a benchmark being constructed from a sample of data that differs from the universe of all PE funds

Answer 25

**Selection** bias refers to a benchmark being constructed from a sample of data that differs from the universe of all PE funds

Question 26

Swensen argues that survivorship bias may be ___ prevalent in PE than public equity.

Answer 26

Swensen argues that survivorship bias may be **less** prevalent in PE than public equity.

Question 27

Risk differences between PE funds and benchmarks can be controlled ___ and \_\_\_-\_\_\_.

Answer 27

Risk differences between PE funds and benchmarks can be controlled **quantitatively** and **non**-**quantitatively**.

Question 28

\_\_\_-\_\_\_ adjustments entail requiring a PE manager to invest only in assets comparable to a peergroup.

Answer 28

**Non**-**quantitative** adjustments entail requiring a PE manager to invest only in assets comparable to a peergroup.

Question 29

Controlling for risk ___ entails requiring the manager's performance to meet ___ standards and adjusting the ex-post performance for risk.

Answer 29

Controlling for risk **quantitatively** entails requiring the manager's performance to meet **quantitative** standards and adjusting the ex-post performance for risk.

Question 30

The Bailey criteria of a benchmark are: 1. U\_\_\_ 2. I\_\_\_ 3. M\_\_\_ 4. S\_\_\_ in \_\_\_ 5. A\_\_\_ 6. R\_\_\_ of ___ \_\_\_ \_\_\_ 7. O\_\_\_

Answer 30

The Bailey criteria of a benchmark are: **1. Unambiguous** **2. Investable** **3. Measurable** **4. Specified in advance** **5. Appropriate** **6. Reflective of current investment opinion** **7. Owned**

Question 31

PE benchmarks do not pass the \_\_\_test as they do not provide a complete representation, only aggregate data.

Answer 31

PE benchmarks do not pass the **unambiguous** test as they do not provide a complete representation, only aggregate data.

Question 32

PE benchmarks are not ___ since they cannot be invested passively.

Answer 32

PE benchmarks are not **investable** since they cannot be invested passively.

Question 33

Since PE fundraising is uncertain, PE benchmarks cannot be ___ in \_\_\_.

Answer 33

Since PE fundraising is uncertain, PE benchmarks cannot be **specified** in **advance**.

Question 34

Since PE involves identifying overlooked opportunities, no benchmark will be fully ___ and consistent with the managers' investment style or area of expertise.

Answer 34

Since PE involves identifying overlooked opportunities, no benchmark will be fully **appropriate** and consistent with the managers' investment style or area of expertise.

Question 35

Since PE manager's incentives are not based on performance relative to a benchmark, the benchmark cannot be \_\_\_.

Answer 35

Since PE manager's incentives are not based on performance relative to a benchmark, the benchmark cannot be **owned**.

Question 36

An appropriate benchmark for a direct investment in portfolio companies is a ___ \_\_\_ ___ \_\_\_

Answer 36

An appropriate benchmark for a direct investment in portfolio companies is a **public benchmark plus premium**

Question 37

For private equity funds, a peergroup should be used to assess outperformance. Once the fund is largely invested, a ___ \_\_\_ \_\_\_can be used.

Answer 37

For private equity funds, a peergroup should be used to assess outperformance. Once the fund is largely invested, a **public market equivalent** can be used.

Question 38

A fund of funds should be benchmarked to its ___ \_\_\_. The comparison should account for the ___ \_\_\_of \_\_\_.

Answer 38

A fund of funds should be benchmarked to its **opportunity set**. The comparison should account for the **additional layer** of **fees**.

Question 39

In the context for a strategic asset allocation to private equity, an appropriate long-term benchmark would be the ___ \_\_\_for PE investing.

Answer 39

In the context for a strategic asset allocation to private equity, an appropriate long-term benchmark would be the **opportunity cost** for PE investing.

Question 40

The problems with benchmarking a PE fund portfolios against other PE funds is that 1. The ___ of fund of funds available in public databases is insufficient. 2. Fund of funds have different investment \_\_\_, portfolio ___ and ___ \_\_\_. These issues can be avoided by comparing the portfolio to a ___ portfolio with the same allocation.

Answer 40

The problems with benchmarking a PE fund portfolios against other PE funds is that 1. The **number** of fund of funds available in public databases is insufficient. 2. Fund of funds have different investment **strategies**, portfolio **components** and **vintage years**. These issues can be avoided by comparing the portfolio to a **synthetic** portfolio with the same allocation

Question 41

PE portfolios can be aggregated in the following ways: 1. ___ average 2. \_\_\_ 3. ___ -\_\_\_ average 4. ___ Average

Answer 41

PE portfolios can be aggregated in the following ways: 1. **Simple** average 2. **Median** 3. **Commitment**-**weighted** average 4. **Pooled** Average

Question 42

The simple average of a PE portfolio may be a good indicator of ___ \_\_\_

Answer 42

The simple average of a PE portfolio may be a good indicator of **selection skills**

Question 43

The ___ IRR represents a PE portfolio's true financial return.

Answer 43

The **pooled** IRR represents a PE portfolio's true financial return.

Question 44

An advantage of the pooled IRR is that is accounts for the ___ and \_\_\_of an investment's cash flows.

Answer 44

An advantage of the pooled IRR is that is accounts for the **timing** and **scale** of an investment's cash flows.

Question 45

Pooled IRRs may get ___ IRRs when cash flows change direction.

Answer 45

Pooled IRRs may get **multiple** IRRs when cash flows change direction.

Question 46

One alternative is the \_\_\_-\_\_\_IRR, which assumes all investments start on the same date and, therefore, does not cause the order of cash flows to affect the portfolio IRR.

Answer 46

One alternative is the **time**-**zero** IRR, which assumes all investments start on the same date and, therefore, does not cause the order of cash flows to affect the portfolio IRR.

Question 47

A ___ \_\_\_ \_\_\_can be used to synthetically generate a PE benchmark.

Answer 47

A **monte carlo simulation** can be used to synthetically generate a PE benchmark.