• Traditional approach in evaluating PE performance is inaccurate and misleading
• Study shows that only the top quartile of buyout funds generate substantial Alpha
eFront, the leading software solutions provider for the alternative assets industry, today announced the release of a Peracs white paper providing insight into the historic performance of private equity. The paper, entitled The Historic Performance of Private Equity – Average versus Top Quartile Returns compares the attractiveness of average and top-quartile private equity investments to similar, i.e., equally risky, public market investments.
Author Oliver Gottschalg, Professor at HEC School of Management and Head of Research at Peracs Ltd., identified and measured the key components of fund-level net returns for a large sample of buy-out funds, capturing the effects of relevant market performance and additional leverage. Most importantly, he quantified the “Alpha” of these funds, i.e., their outperformance relative to equally risky public market investments.
The study compares the long-term IRR or private equity investments to the annualized long-term passive returns from public market indices and finds that unbiased and risk-adjusted performance measures make it possible to identify the Alpha of buyout funds. Findings from the white paper show the top quartile buyout funds reveal a substantially higher absolute performance as well as a significant alpha.
“This study highlights how inaccurate the traditional approach is in evaluating private equity performance. The approach based on performance measured as IRR, as compared to long-term stock market returns, is misleading” said Oliver Gottschalg, Professor at HEC School of Management and Head of Research at Peracs Ltd. He further commented, “We are happy to have closely collaborated with eFront to broadly communicate these interesting findings and bring relevant insights to the community.”
“Oliver Gottschalg provides an excellent overview of the challenges that private equity now faces in assessing fund performance,” added Eric Bernstein, Chief Operating Officer, eFront, North America. “Both Peracs Ltd. and eFront help investors achieve a better understanding of the value drivers behind private equity investments and, subsequently, make better investment decisions.”
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