What’s most surprising about aggregated private market performance calculations?

The widespread “tolerance” of mathematical errors, gross inaccuracy, and representativeness among private market investors, advisers, enthusiasts, detractors, and even academics.

In the traditional asset classes, investment professionals are laser-focused on every “micron” of performance difference in their attribution analyses. With private market assets, however, excessive approximation is the order of the day.

The Troubled Waters of Private Equity Performance Attribution

The variability of cash flows makes performance attribution of private market assets much more challenging: Returns aren’t generated by a stable underlying asset base, so there is no possibility of reinvestment or compounding.

As I’ve written before, today’s performance attribution toolkit is composed of metrics — internal rates of return (IRRs), total values to paid in (TVPIs), public market equivalents (PMEs), and the various alphas — that work at the single asset level at best but cannot be generalized.

So, what does generalization actually mean?


In non-mathematical terms, generalization allows for meaningful comparisons. We should be able to tell whether a given IRR or TVPI is objectively “better” than another, that it represents more return or less risk.

Given two comparable investments, is a 15% IRR better than 10%? While the optical illusion implies that it is, in reality we can’t give an accurate response without more data. We need information about time and capital invested. That means time-weighted metrics rather than the money-weighted approximations currently in use.

That 10% IRR may be preferable if it is earned over a longer period of time, let’s say four years as opposed to two years for the 15%. This leads to a 1.4x multiple on invested capital (MOIC) for the 10%, which outpaces the 1.3x MOIC of the 15%. But we still need a duration component to reach any reasonable conclusion.

According to the IRR narrative, money recouped earlier could be reinvested at the same rate of return. But this is just an assumption. In fixed income, a prepayment is typically treated as reinvestment risk. Past returns are no guarantee of future results.

But let’s trouble the waters even more and throw another stone.

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