PERFORMANCE MEASUREMENT AND BENCHMARKING IN …

1 13CT AlternativeL Jjl InsiqhtI ' ' private EQUITYINTERNATIONALPERFORMANCEMEASUREMEN T ANDBENCHMARKING INPRIVATE EQUITYM aking sense of absolute and relative returns on investmentEdited byMontana Capital PartnersContentsFigures and tables viiAbout the editors xiEditors' preface xiiiBy Christian Diller and Marco Wulff, Montana Capital Partners1 The private equity PERFORMANCE puzzle - let there be light! 3By Christian Diller and Marco WulffDoes private equity outperform?

2 3 Section I: Understanding PERFORMANCE in private equity 5 Section II: BENCHMARKING private equity returns 6 Section III: Winners and losers - the private equity performancedifferential 7 Section IV: Looking for the premium - how LPs think aboutperformance MEASUREMENT 7So, does private equity outperform? 8 The 'real world' 11 Can the asset class continue to deliver?

3 1315 Why is the evidence on private equity performanceso confusing? 17By Ludovic PhalippouIntroduction 17 Industry approach to. PERFORMANCE MEASUREMENT 18 Bias in the returns: an illustrative example 20 Why is there a bias? 22 Illustration using actual cash flow data 22 Making it worse: the usual IRR pitfall 24 Further discussion and conclusion 25 IRR vs.

4 TWR, or why can't we all just get along 29By Jesse Reyes, QuartileOne, LLCSo how did we get here - why can't we just get along? 29A bit of history 30 What are we measuring and why is it so difficult 31 ContentsWe have a return of 300 percent - is that good? 32So what's the problem with IRR? 35Ok, so how about the time weighted return? 37 Public/ private comparisons and BENCHMARKING 38 Conclusion 38 Beyond IRR once more 41By Christoph Kaserer and Christian DillerIntroduction 41 IRRs of European private equity funds 42 BENCHMARKING returns by using the PME-approach 45 Extending the PME-approach to asset allocation considerations 47 Conclusion

5 50 Secret history 53By David SnowPrivate investments: shedding some light on thehistorical record 57By Eric Johnson, Cambridge AssociatesIntroduction 57 Overview of the returns data 58 The 'top' quartile 'persistence' and interim results 72 Conclusion 75 SECT1OM II: BENCHMARKING private EOUITY ^iTTONS 797 Hero or zero.

6 Two tales of private equityperformance potential 81 From the archives of private equity InternationalStory I: Oxford academic says industry 'grossly exaggerates' returns 81 Story II: private equity surges at US pensions 828 Interview: PE has outperformed 'in most years' 85By David Snow9 private equity benchmarks: methods and meaning 89By Jesse Reyes, QuartileOne, LLC andAustin Long, Alignment Capital Group, LLCWhat is a benchmark? 89 Opportunity cost and BENCHMARKING 89 Can private equity truly be benchmarked?

7 91 Peer group benchmarks are not enough 96 Searching for alpha 99 Navigating the benchmark forest 99 The need for additional benchmarks 107 ContentsPublic market equivalents 107 Summary of PME methods 116 Conclusion 11710 Advancing PERFORMANCE MEASUREMENT in private equitythrough adjustment of leverage 119By David Robinson and Berk SensoyIntroduction - -'.

8 119 Absolute PERFORMANCE MEASUREMENT is easy to report, buthighly uninformative 119 Relative PERFORMANCE is what we should care about 120 Extending relative PERFORMANCE MEASUREMENT 122 Conclusion 125 AND L $EK$ - THE private EQUITYi^ENTlAIL 12711 Bain two ways 129By David SnowHigher carry, lower fees - or vice versa? 12930 beats barely 13012 BENCHMARKING leveraged buyout transactions 133By Alexander Peter Groh.

9 GSCM - Montpellier Business SchoolIntroduction 133 Mimicking public market investment 134'Can factory'- an example 137 Conclusion 14013 private equity PERFORMANCE BENCHMARKING 143By Robert M. Ryan, Peracs Due Diligence ServicesTraditional private equity PERFORMANCE BENCHMARKING :measures and process 143 Towards more advanced private equity PERFORMANCE benchmarks 148 The fund selection efficiency of advanced private equitybenchmarking techniques 15014 private equity funds.

10 Return characteristics, return driversand consequences for investors 153By Christoph Kaserer and Christian DillerIntroduction 153 PERFORMANCE analysis of private equity funds 155 Evidence on the money-chasing-deals phenomenon 160 What is the impact of the GP's skills? 164 Conclusion 166 ContentsIE MEASUREMENT 16915 private equity BENCHMARKING : A practitioner's viewpointon issues and solutions 171By Benjamin Abramov, University of Toronto Asset ManagementIntroduction.