CAIA Level II: Advanced Core Topics in Alternative Investments, 2nd Edition

CHAPTER 10

Measuring Performance and Benchmarking in the Private Equity World

Measuring and benchmarking in the private equity (PE) world is as important as for any other asset classes. For individual transactions, it will not only be a key part of the due diligence process through the track record analysis but also be a key performance indicator during the monitoring phase. The same is also true for a portfolio of funds, either for self-assessment or, in the case of funds of funds, for the selection of a manager.

Private equity investments have key characteristics that distinguish this asset class from others. These characteristics explain why private equity performance measures are different from the ones commonly used for other asset classes such as the time-weighted rate of return. This implies that not only benchmarking but also, for example, portfolio construction techniques will be different.

10.1 INDIVIDUAL FUNDS

Both investors and investment managers have an interest in performance measurement. Investors conduct performance measurement for three purposes: (1) to monitor changes in the value of their investments, (2) to evaluate and compare investment managers, and (3) to obtain inputs for asset allocation. Investment managers are also interested in performance measurement, in their case to evaluate and improve their investment process and to market their services to and communicate with current and potential investors.

Due to its unique characteristics, performance measurement ...