A New Approach to Evaluating Private Equity Performance

The word “private equity” refers to a sort of corporate ownership that is traded privately rather than publicly. Private equity performance measurement necessitates a variety of methodologies depending on the characteristics of the underlying fund portfolio. Private equity companies add value to growth-oriented enterprises by speeding up their market value proposition, improving cash conversion, and lowering risk. As a result, this article on the UCLA Anderson Review website recommends how organizations might successfully analyze their private equity performance.

According to the article, it is difficult for investors to completely grasp the possible risks and benefits of private equity investments. The article outlines that despite the risks of illiquid investments and a lack of transparency in financial reporting, these funds had an estimated $5.3 trillion in assets under administration at the end of 2021. Nevertheless, because restructuring and selling a firm might take several years, investment returns do not arrive in clean, regular intervals. Furthermore, the values of investments before they are sold are frequently outdated and sometimes prejudiced. One of the most frequent techniques for assessing private equity performance, according to the article, is to discount an investment’s cash flows to compute its return. The article focuses on two private equity performance metrics: Investor Portfolio Equivalent (IPE) and Generalized Investor Portfolio Equivalent (GIPE) (GIPE). According to the article, a positive IPE statistic shows that an investor may boost the growth rate of their portfolio by increasing their allocation to private equity. The GIPE measure, on the other hand, determines the discount rate to employ using an adequately scaled version of the investor’s portfolio and enables for direct evaluation of outperformance. As a result, a positive GIPE signifies a significant increase in the pension plan’s investment opportunity set beyond what public stocks provide. Lastly, the article suggests that, with increased pressure on pension plans to maximize returns while avoiding risk, these techniques may be able to assist the industry in bringing transparency and accountability to a hitherto opaque area of the financial sector.

Private equity may be an extremely favorable avenue to growth, allowing firms to expand quickly and with the skills, experience, and funding to back even the most audacious of goals. Here are a few strategies for efficiently analyzing private equity performance.