CAIA - 08 - Private Equity Benchmarking Flashcards
“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 ___.”
“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.”
“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 ___”
“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”
PE is essentially an ___ ___ ___, with assets valued by professional appraisers rather than by consensus reflected in market prices.
PE is essentially an appraised asset class, with assets valued by professional appraisers rather than by consensus reflected in market prices.
Due to lack of consensus on valuation and of third–party oversight, VC may suffer losses due to ___.
Due to lack of consensus on valuation and of third–party oversight, VC may suffer losses due to overvaluation.
Buyout investments have ___ valuation risk than VC funds.
Buyout investments have less valuation risk than VC funds.
Buyout valuations are based on ___ ___
Buyout valuations are based on cash flow
The ___ is the discount rate that makes the present values of cash inflows equal to the present values of the cash outflows.
The IRR is the discount rate that makes the present values of cash inflows equal to the present values of the cash outflows.
The ___–___ ___ IRR and the ___–___ IRR are considered by industry associations and the CFA institute to be the most appropriate measures of PE fund returns.
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.
The ___ to ___ ___ ___or ___ ___measures cumulative distributions to investors relative to the total capital drawn from investors.
The distribution to paid in ratio or realized return measures cumulative distributions to investors relative to the total capital drawn from investors.
The ___ ___to ___ ___ ___or ___ ___measures the total value of unrealized investments relative to the total capital drawn from investors in previous periods.
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.
The ___ ___to ___–___ratio or ___ ___measures cumulative distributions to investors plus the value of unrealized portfolio investments, relative to
The total value to paid–in ratio or total return measures cumulative distributions to investors plus the value of unrealized portfolio investments, relative to
Buyout funds typically generate positive returns ___ than venture capital funds.
Buyout funds typically generate positive returns sooner than venture capital funds.
The NAV of a PE fund ___ in the fund’s early years and ___in later years.
The NAV of a PE fund decreases in the fund’s early years and increases in later years.
There are two broad types of benchmarks:
- ___-based benchmarks
- ___-based benchmarks
There are two broad types of benchmarks:
- Asset-based benchmarks
- Peergroup-based benchmarks
PE is considered an ___ return class
PE is considered an absolute return class
A ___ ___index is comprised of share prices of publicly traded PE firms
A listed PE index is comprised of share prices of publicly traded PE firms
Listed PE indices have ___ risk-return characteristics than non-listed PE indices.
Listed PE indices have different risk-return characteristics than non-listed PE indices.
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.
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.
The most intuitive form of benchmarking for PE funds is to compare a PE fund to a ___.
The most intuitive form of benchmarking for PE funds is to compare a PE fund to a peergroup.
A benchmark commonly used for PE is a ___-___ ___, which is a group of PE funds with similar traits.
A benchmark commonly used for PE is a peer-group cohort, which is a group of PE funds with similar traits.
PE fund databases suffer from a number of shortcomings:
- PE investors ___ provide data
- Databases do not ___ ___the ___
- The quality of data is ___ and generally ___
- Databases that include data from PE funds of funds may ___ ___data
- Data related to ___and ___ ___are often excluded or incorrectly classified.
PE fund databases suffer from a number of shortcomings:
- PE investors voluntarily provide data
- Databases do not fully represent the market
- The quality of data is inconsistent and generally poor
- Databases that include data from PE funds of funds may double count data
- Data related to innovations and emerging markets are often excluded or incorrectly classified.
Some traits of peergroups present challenges:
- Peergroup ___ are not known
- Peergroups are not ___
Some traits of peergroups present challenges:
- Peergroup populations are not known
- Peergroups are not investible
Publicly available databases are subject to biases, which reflect PE’s lack of transparency:
- ___ bias
- ___pricing
- ___ ___bias
- ___bias
- ___bias
Publicly available databases are subject to biases, which reflect PE’s lack of transparency:
- Valuation bias
- Stale pricing
- Instant history bias
- Selection bias
- Survivorship bias
___ ___ bias occurs when database providers add return data to their databases that correspond to a PE fund’s incubation period.
Instant history bias occurs when database providers add return data to their databases that correspond to a PE fund’s incubation period.
___ bias refers to a benchmark being constructed from a sample of data that differs from the universe of all PE funds
Selection bias refers to a benchmark being constructed from a sample of data that differs from the universe of all PE funds
Swensen argues that survivorship bias may be ___ prevalent in PE than public equity.
Swensen argues that survivorship bias may be less prevalent in PE than public equity.
Risk differences between PE funds and benchmarks can be controlled ___ and ___-___.
Risk differences between PE funds and benchmarks can be controlled quantitatively and non-quantitatively.
___-___ adjustments entail requiring a PE manager to invest only in assets comparable to a peergroup.
Non-quantitative adjustments entail requiring a PE manager to invest only in assets comparable to a peergroup.
Controlling for risk ___ entails requiring the manager’s performance to meet ___ standards and adjusting the ex-post performance for risk.
Controlling for risk quantitatively entails requiring the manager’s performance to meet quantitative standards and adjusting the ex-post performance for risk.
The Bailey criteria of a benchmark are:
- U___
- I___
- M___
- S___ in ___
- A___
- R___ of ___ ___ ___
- O___
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
PE benchmarks do not pass the ___test as they do not provide a complete representation, only aggregate data.
PE benchmarks do not pass the unambiguous test as they do not provide a complete representation, only aggregate data.
PE benchmarks are not ___ since they cannot be invested passively.
PE benchmarks are not investable since they cannot be invested passively.
Since PE fundraising is uncertain, PE benchmarks cannot be ___ in ___.
Since PE fundraising is uncertain, PE benchmarks cannot be specified in advance.
Since PE involves identifying overlooked opportunities, no benchmark will be fully ___ and consistent with the managers’ investment style or area of expertise.
Since PE involves identifying overlooked opportunities, no benchmark will be fully appropriate and consistent with the managers’ investment style or area of expertise.
Since PE manager’s incentives are not based on performance relative to a benchmark, the benchmark cannot be ___.
Since PE manager’s incentives are not based on performance relative to a benchmark, the benchmark cannot be owned.
An appropriate benchmark for a direct investment in portfolio companies is a ___ ___ ___ ___
An appropriate benchmark for a direct investment in portfolio companies is a public benchmark plus premium
For private equity funds, a peergroup should be used to assess outperformance. Once the fund is largely invested, a ___ ___ ___can be used.
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.
A fund of funds should be benchmarked to its ___ ___. The comparison should account for the ___ ___of ___.
A fund of funds should be benchmarked to its opportunity set. The comparison should account for the additional layer of fees.
In the context for a strategic asset allocation to private equity, an appropriate long-term benchmark would be the ___ ___for PE investing.
In the context for a strategic asset allocation to private equity, an appropriate long-term benchmark would be the opportunity cost for PE investing.
The problems with benchmarking a PE fund portfolios against other PE funds is that
- The ___ of fund of funds available in public databases is insufficient.
- Fund of funds have different investment ___, portfolio ___ and ___ ___.
These issues can be avoided by comparing the portfolio to a ___ portfolio with the same allocation.
The problems with benchmarking a PE fund portfolios against other PE funds is that
- The number of fund of funds available in public databases is insufficient.
- 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
PE portfolios can be aggregated in the following ways:
- ___ average
- ___
- ___ -___ average
- ___ Average
PE portfolios can be aggregated in the following ways:
- Simple average
- Median
- Commitment-weighted average
- Pooled Average
The simple average of a PE portfolio may be a good indicator of ___ ___
The simple average of a PE portfolio may be a good indicator of selection skills
The ___ IRR represents a PE portfolio’s true financial return.
The pooled IRR represents a PE portfolio’s true financial return.
An advantage of the pooled IRR is that is accounts for the ___ and ___of an investment’s cash flows.
An advantage of the pooled IRR is that is accounts for the timing and scale of an investment’s cash flows.
Pooled IRRs may get ___ IRRs when cash flows change direction.
Pooled IRRs may get multiple IRRs when cash flows change direction.
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.
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.
A ___ ___ ___can be used to synthetically generate a PE benchmark.
A monte carlo simulation can be used to synthetically generate a PE benchmark.
