You’re looking to invest in private equity. How can you compare your performance with industry standards?

The Internal Rate of Return (IRR) is frequently the compass when making private equity investments. It functions similarly to the scoreboard that indicates your performance in the game. You can gauge how well your performance is doing by comparing the internal rate of return (IRR) on your investment to industry benchmarks. You should celebrate if your IRR is higher than the industry average; if it is lower, it indicates that your strategy needs to be adjusted. IRR offers a dynamic lens through which you can evaluate your investment performance in relation to the overall market, ensuring that you're not just in the game but at the forefront. It's not just about the numbers.

In my opinion these are the most useful metrics: Internal rate of return (IRR): This measures the annualized return of a PE fund by taking into account the size and timing of its cash flows and net asset value. Multiple of money (MoM): This measures the return on invested capital by dividing the total value of the fund by the total capital invested. Public market equivalent (PME): This compares the performance of a PE fund to a public market index, by replicating the cash flows of the fund as if they were invested in the index. Risk-adjusted return (RAR): This measures the return per unit of risk of a PE fund by dividing the excess return over a risk-free rate by a measure of risk, such as the standard deviation or the beta of the fund.

Using IRR to gauge performance is insightful, yet it's vital to consider it alongside other metrics like multiple of invested capital (MOIC) for a fuller picture of return on investment. Also, benchmarking against industry standards requires access to comprehensive data. Platforms like Preqin or PitchBook can provide sector-specific benchmarks, offering a clearer view of how your investments stack up. Balancing quantitative metrics with qualitative assessments of market conditions and fund management strategies can offer a more nuanced understanding of performance.

When investing in private equity, comparing your performance with industry standards is crucial. Key metrics include Internal Rate of Return (IRR), which measures investment profitability, and Multiple of Invested Capital (MOIC), comparing final investment value to capital invested. Public Market Equivalent (PME) assesses private investment performance against public market indexes. Utilise benchmarking tools and best practices to enhance performance, and consider risk-adjusted returns and portfolio diversification for a comprehensive evaluation.

Es la tasa de descuento que iguala el valor presente de los flujos de efectivo de una inversión con el costo inicial de la misma. Es una medida de la rentabilidad de una inversión en términos anualizados. La TIR se puede comparar con la de otras inversiones similares o con la de un índice de referencia del mercado.

In my role as a global strategy and coaching expert, especially when considering investments in private equity, comparing performance with industry standards is crucial. A key metric I use for this comparison is the Multiple of Invested Capital (MOIC). MOIC provides a clear and direct measure of return on investment by comparing the current value of an investment to the original amount invested. This metric allows for an objective assessment of performance relative to industry benchmarks. By regularly analyzing the MOIC of my investments and contrasting them with industry standards, I can gauge the effectiveness of my investment strategies and make informed decisions to align with or exceed these benchmarks.

Es el cociente entre el valor actual de una inversión y el capital inicial invertido. Es una medida de la rentabilidad absoluta de una inversión, sin tener en cuenta el tiempo. El MCI se puede comparar con el de otras inversiones similares o con el de un índice de referencia del mercado.

Para maximizar o desempenho em Private Equity (PE) usando o Múltiplo do Capital Investido (MOIC): 1. **Foco no Retorno Absoluto:** Ênfase em oportunidades que ofereçam retornos absolutos sólidos, alinhados com objetivos de longo prazo. 2. **Análise Rigorosa:** Realização de análises detalhadas para compreender os fatores que impulsionam o retorno absoluto. 3. **Gestão Ativa:** Gestão ativa do investimento para agregar valor à empresa-alvo. 4. **Controle de Riscos:** Implementação de controles robustos para mitigar riscos e diversificação adequada da carteira. 5. **Transparência e Governança:** Priorização de investimentos em empresas com alta transparência e governança.

Suppose a private equity firm invested in a technology startup five years ago. To assess the performance of this investment, the firm can calculate the PME by comparing the returns of their investment against a relevant public market index, such as the NASDAQ Composite, which tracks technology companies. If the PME calculation shows that the private equity investment outperformed the NASDAQ over the same period, it suggests that the investment decision was sound and offered a better return than if the same funds were invested in the public market. This kind of analysis is valuable for assessing investment strategies and understanding the value added by private equity investments relative to public market alternatives.

Es una metodología que consiste en estimar el valor de una inversión en capital privado como si fuera una inversión en el mercado público, utilizando un índice de referencia adecuado. Es una forma de ajustar el valor de una inversión en capital privado por el riesgo y la liquidez que implica. El EME se puede comparar con el de otras inversiones similares o con el de un índice de referencia del mercado.

The first thing one should do before investing in any Private Equity form is to compare it's internal rate of return against the index. If the PE firm is not beating the index or mutual funds by a wide margin, then one should seriously consider the opportunity cost and risk premium that one is putting at stake for comparatively minor return against money locked-in. Check the EBITDA, net profitability, cash flow, etc. before putting in your hard earned money anywhere. Such due diligence helps one avoid the sunk-cost fallacy.

O Private Market Equivalent (PME) compara o desempenho do Private Equity (PE) com um índice de mercado público, ajustando os fluxos de caixa do PE com os retornos do mercado público. Uma estratégia seria usar a PME para avaliar o desempenho relativo do PE em relação ao mercado público, considerando o custo de oportunidade e o prêmio de risco associado ao PE. Isso pode informar a tomada de decisões sobre alocação de recursos, buscando otimizar a relação entre risco e retorno.

For institutional private equity investors, Public Market Equivalent (PME) methods are crucial benchmarks. Your private capital program should consistently outperform the public market on a risk-adjusted basis. However, there are various PME methods, including modified PME, PME+, Long-Nickels PME, Direct Alpha, and the widely recognized Kaplan-Schoar PME. If you're a multi-billion dollar LP, it's best not to get them mixed up! 😉

Es una herramienta que permite comparar el desempeño de una cartera de inversiones en capital privado con el de una cartera de referencia del mercado, utilizando diferentes indicadores y metodologías. La HEC se puede utilizar para analizar el desempeño relativo de una cartera de capital privado, identificar las fuentes de valor agregado y ajustar el riesgo y la liquidez de las inversiones.

Para comparar o desempenho de Private Equity (PE) com padrões e benchmarks do setor, é crucial utilizar fontes confiáveis e consistentes de dados e análises. Ferramentas de benchmarking como PitchBook, Preqin, Cambridge Associates e Burgiss fornecem dados abrangentes sobre fundos de PE, empresas e desempenho em diferentes geografias, setores e estratégias. Além disso, essas ferramentas oferecem recursos para fatiar, filtrar e visualizar dados, permitindo comparações com grupos de pares relevantes. Ao usar essas ferramentas, é possível identificar drivers de desempenho e lacunas, ajudando na tomada de decisões informadas e na otimização da estratégia de investimento em PE.

Harris, Jenkinson, and Stucke found in 2012: "Using three popular data sources and applying metrics typically adopted in the industry, the authors demonstrate that even modest variations in methods can result in half of all funds being able to claim “top quartile” results." The only statistics you can trust are those you falsified yourself also applies to peer group ranking.

Son las normas y los lineamientos que se consideran óptimos para la gestión y la evaluación de las inversiones en capital privado, teniendo en cuenta los aspectos financieros, sociales y ambientales. Las PR se pueden utilizar para mejorar la calidad y la transparencia de las inversiones en capital privado, así como para alinear los intereses de los diferentes actores involucrados.

Para otimizar a medição e comparação do desempenho de Private Equity (PE), é fundamental utilizar diversas métricas e ferramentas para capturar diferentes aspectos e perspectivas. A escolha de benchmarks e grupos de pares apropriados e consistentes é crucial. Compreender as premissas, metodologias e limitações de cada métrica e ferramenta é essencial, ajustando-as conforme necessário. A revisão e atualização regulares dos dados e análises de desempenho de PE são fundamentais para embasar decisões de investimento, feedback e aprendizado. Seguindo essas práticas, é possível comparar o desempenho de PE com os padrões do setor de forma significativa, melhorando assim as habilidades e resultados de investimento em PE.

(a) Distributions to Paid-In (DPI) provides insights into the cash-on-cash returns from the investment. In my portfolio assessments, analyzing the DPI ratio and comparing it to sector-specific benchmarks helps in understanding the liquidity and realized gains of the investments, which is critical for evaluating performance in the context of cash flow (b) Many private equity funds provide their own benchmarks based on their investment focus and strategy. For a sector-focused fund I invested in, comparing its performance against its self-defined benchmarks, which were closely aligned with the specific market segment it targeted, offered a nuanced understanding of its relative success and strategic positioning.