Private Equity 4.0: Reinventing Value Creation

4 Private equity performance

Executive Summary

In this chapter, we look at how private equity performance is measured, and how it compares to the risk and return of other asset classes. In order to measure performance, the industry relies on two main metrics: the Internal Rate of Return (IRR), which is an annualized effective compounded rate of return, and the Total Value to Paid-In Capital (TVPI), which provides a multiple of capital invested. While both metrics can sometimes provide conflicting insights on performance—the IRR takes into account the time value of money, while the multiple does not—both measures need to be considered simultaneously when analyzing an investment. On a quarterly basis, the private equity firm will report to LPs a valuation of all investments in the portfolio, whether realized or still unrealized. While realized investments have an undisputed value that is given by the exit value of the portfolio company, unrealized investments are valued in a more subjective way by the GP following guidelines which leave much room for interpretation.

Contrary to public equities that exhibit relatively low variance, private equity funds display huge performance disparities. The high variance is an indication of the level of risk of the asset class. Because of its characteristics, venture capital in particular tends to be more risky than buyouts and hence the performance ...