Understanding the Shortness of LN PMEAuthor: Philippe Jost, Capital Dynamics; Philipp Stoll, Evoco
Date: July 2015
Measuring the performance of private equity is challenging due to the irregular timing of the cash fl ow. Internal rates of return (IRR) and performance multiples are often-used methods, with the latter being simpler and relating the distributions to the investments.
While performance multiples have the disadvantage of disregarding the time value of money, the IRR takes it into account by computing the equivalent rate at which the present value of the investments is equal to the present value of the distributions and the NAV of the investment. Monitoring both, the IRR and multiples, results in a good absolute performance overview of a private equity fund.
These performance measures are specific to private equity (or more generally any asset class that has irregular cash fl ows) and allow a comparison between different funds. Public benchmarking is the comparison of private equity funds to public benchmarks and is very important as it computes the opportunity cost of investing in private equity as compared to public equity
Source: Preqin Special Report