Practical analysis for investment professionals
18 November 2015

Meaningful Private Equity Fund Performance Evaluation

Evaluating the performance of private equity (PE) funds is tricky at best. To begin with, the companies such funds hold do not have quoted market prices, so there are no regular market returns to base a performance evaluation on. Calculating a PE fund’s internal rate of return is somewhat useful, but it does not adjust for the market return or for the risk of the investment.

Morten Sorensen and Ravi Jagannathan decided to tackle the question of how to effectively evaluate the performance of PE funds, and they offered a rigorous theoretical justification for using the public market equivalent (PME). Their research and conclusions are published in “The Public Market Equivalent and Private Equity Performance” in the July/August 2015 issue of the Financial Analysts Journal. I had the chance to speak with Sorensen and Jagannathan about their work.



Jagannathan says that the genesis of the article was seeing a presentation by Steven Kaplan about the PME that he and Antoinette Schoar introduced in an article published in the Journal of Finance in 2005. “When I was listening to Kaplan’s presentation at a conference in March 2013 at Stanford, I realized that [Kaplan and Schoar’s] PME is equivalent to using what is now known as the dynamic CAPM. . . . When Morten Sorensen visited me at Kellogg a month later, I mentioned this to him, and Morten found also that it was very interesting.”

To learn more about the concerns Jagannathan and Sorensen had about evaluating the performance of PE funds and the benefits of and conditions for using PME, listen to the interview above or download the MP3. CFA Institute members and subscribers can read the full article on the CFA Institute Publications website.

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All posts are the opinion of the author. As such, they should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute or the author’s employer.

Image credit: ©iStockphoto.com/Hong Li

About the Author(s)
Pat Light

Pat Light was an assistant editor at CFA Institute. Before joining the CFA Institute editorial staff, he worked as a teacher. Light has a bachelor's degree in English from Duke University.

2 thoughts on “Meaningful Private Equity Fund Performance Evaluation”

  1. Jamie Ebersole says:

    The PME methodology has been used by sophisticated private equity investors for almost a decade. CAPM-type approaches have also been used very widely. The problem with all of these models is that they are much better suited to quoted markets where information and pricing is known on a daily basis. For a private equity fund, you don’t know what your real performance will be for many years, and likely until at least year number 7 when sufficient capital has been returned to provide a strong indication of final returns. Thanks for the additional research. I continue to believe that PME is a good tool and used in conjunction with other methodologies will help investors understand the performance of their private equity funds.

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