Tutorial 11 - Fund Economics and Performance Calculations

Question 1

3 categories of performance measurement in PE during the fund lifetime

Answer 1

1. Actual Values (contributions + Distributions + NAV)
2. Comparison with Hypothetical Public Portfolio (HP)
3. Future Values

Question 2

Which performance measurement measures count to HP comparison?

Answer 2

LN-PME
PME+
mPME

Question 3

Which performance measurement measures count to future values?

Answer 3

KS-PME
Direct Alpha

Question 4

Which performance measurement measures count to actual values?

Answer 4

Money Multiples
IRR
Modified IRR

Question 5

What is the disadvantage of Money Multiples?

Answer 5

Disregards the time value of money

Question 6

What is the disadvantage of IRR?

Answer 6

• not directly comparable to the buy and hold returns that can be found in public markets
• implicit reinvestment assumption
  -> not an effective way of assessing mutually exclusive projects

Question 7

What is the disadvantage of mIRR?

Answer 7

Does not show performance relative to a benchmark

Question 8

What is the disadvantage of Long-Nickels Public Market Equivalent?

Answer 8

• In case of strong outperformance/underperformance of the PE portfolio, the reference portfolio carried a large short/long position in later years –> As PE portfolio approaches liquidation the swings in the benchmark have almost no impact on PE portfolio investments –> unreliable measure
• cash flows at end make calculations of IRR (HP) difficult. “shortness-issue”

Question 9

What is the disadvantage of PME+ ?

Answer 9

• Given the sensitivity of the IRR measure to early distributions, a downscaling
  (upscaling) in case of an outperformance (underperformance) by the PE portfolio has
  an inflating effect on the positive (negative) Δ IRR
• PME+ cannot be calculated, by definition, for younger PE portfolios, if no distributions
  have yet taken place (and in cases in which only a few distributions have occurred, the
  scaling factors may actually be negative and turn distributions into additional
  contributions)
• In contrast to LN-PME, PME+ is not an investable portfolio → no replication possible
• PME+ does not perfectly match the cash flows

Question 10

What is the disadvantage of mPME ?

Answer 10

• any rescaling of distributions, whether with a fixed or a time-varying scaling factor has an inflating effect on delta of IRR
• rescaling distributions relative to interim balances of illiquid assets is likely to generate an additional bias if there are any pricing errors in the time series of the PE portfolio’s interim NAVs

Question 11

How to best infer outperformance?

Answer 11

Using the direct alpha

Question 12

Disadvantages of the KS PME?

Answer 12

No information about the per-period rate