Lecture 9: Performance of PE: academic perspective Flashcards
When can a fund’s performance be measured?
After the liquidation of the fund (i.e. when all portfolio companies have exited) the exact timing and amount of all cash flows in fully available –> measurement without error based on actual cash distribution
The performance evaluation before is based on estimates of portfolio company worth.
What does the J-curve show?
The cumulated cashflow = cash distributions of payouts - draw downs (drawing committed capital for investment activities)
Three main measures of PE fund performance
- IRR
- Return Multiples
- Public Market Equivalent (PME)
investment horizon
entire funds lifetime not investment period
Pros of the IRR
- considers all cash flows
- factors in the time value of money
Cons of IRR
- does not factor in risk
-ignoring the size of CF might lead to faulty decisions - complex arithmetic
- calculation is highly sensitive to timing of CFs
How can the IRR be boosted?
By exiting early. So positive cash flow comes in early. –> Might not be optimal decision for investors
What are return multiples?
Multiple = returns from the fund/ invested money
What are the three multiples normally reported?
- Distributed value to paid-in ratio (DVPI)
- Residual value to paid-in ratio (RVPI)
- Total value to paid-in ratio (TVPI)
What are the cons of the return multiplers?
- time value of money is ignored
- risk is not captured
When can DVPI be measured
At any time. Usually negative at the beginning of the J-curve
How is TVPI calculated?
DVPI + RVPI
PI
The “paid-in” (PI) in TVPI, DPI and RVPI represents the total amount of capital called by a fund (for investment and to pay management and other fees) at any given time.
DI
- The “distributed” (D) in DPI represents capital that has been returned to fund investors following the sale of a fund’s stake in a portfolio company.
RV
- The “residual value” (RV) in RVPI represents the fair value of the stakes that a fund holds in its portfolio companies and is measured by its net asset value (NAV).
PME
Public Market Equivalent
- index return measure benchmarking private investing performance with public equity markets
Pros of PME
- takes alternative investment opportunities into account
Cons of PME
- tricky to define similar investments. Public investments would need to match the PE investments in terms of
- CF timing
- systematic risk pattern of PE
What does a PME >1 mean?
That the unit at hand (fund) has performed better than the public market used as a benchmark. Vice versa
When was there a high IRR for VC funds? When was there a negative IRR?
There was a high IRR of 44% before 1999 whereafter the IRR declined.
Who took the best investment decision based on IRR of all the types of investors (before 1999)
University endowment funds
Do currently PE or VC firms provide higher returns?
PE
Is there usually a large variance in term of performance between the investor types?
No
What is the mean spread for a gross fund return of 2.2-2.4MM?
.42MM
Is past performance of PE funds indicative of future performance?
It was so in the past, but in recent years this does not really hold anymore.
Can persistence be shown on deal level?
Yes.
Is performance in PE persistent if competition is high?
No. If competition is high, performance by PE fund managers is significantly less persistent. In particular PE fund managers doing a successful deal are less likely to repeat this with following deals.
Does it pay off to pay premium fees to funds that were in the top quartile in the past?
Not necessarily
