Benchmarking Private Equity

by Etienne Paresys

  • 11 Sep 2009
  • PE

Comparing investment performance is essential for private equity investors and fund managers alike, but the lack of reliable tools often make it difficult to establish consistent and comprehensive benchmarks. Many financial data providers are competing to offer in-depth comparison tools for other investment classes but data is very limited for private equity.

Preqin calculates benchmarks for buyout, fund of funds, mezzanine, real estate private equity, early stage and venture funds across North America, Europe and Asia and Rest of World. Performance ratios for called-up, distribution, unrealised value, multiples and IRRs are calculated for median, average, money-weighted and pooled benchmarks.

Preqin’s median benchmark simply ranks the fund performance from the best to the worst and is particularly helpful to compare specific funds against a typical median return. This type of benchmark is also used to identify the top, median and bottom quartile IRRs and multiples, and therefore can be used to identify which funds are ranked top quartile or bottom quartile. Money-weighted and pooled benchmarks are both aimed at assessing the performance of a portfolio of funds. The performance ratios are weighted according to the size of each fund therefore reflecting the total returns that LPs can expect to earn on their private equity investments as a whole. Pooled benchmark IRRs are the most accurate measurement as it also takes into account the timing of each contribution and distribution. Pooled cash flow IRRs are calculated by aggregating cash flows for a portfolio of funds; and calculating the resulting IRR. Money weighted is a benchmark that takes the performance ratios of each individual fund and calculates a weighted average using the size of each fund. Figures calculated using the money-weighted methodology are very close to pooled cash flow IRRs but the universe of funds is much larger and the results are therefore more robust.

Aiming to bring increased transparency and understanding to the private equity industry, Preqin is now offering everyone in the industry the opportunity to gain free access to our powerful benchmarks. Register here to get free online access to our Private Equity Benchmarks.

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