Chapter 3
Performance measurement in private equitya
3.1 OVERVIEW
A major reason for the explosive growth of the private equity market since 1980 has been the expectation by institutional investors of financial returns substantially higher than those of other investment alternatives. However, the measurement of private equity funds’ performance has been historically a relatively difficult task as private equity funds have no obligation to publicly disclose detailed information about their investments in privately held companies and the returns on these investments. Application of the Freedom of Information Act in the U.S. and the publication of the David Walker Guidelines for Disclosure and Transparency in Private Equity in the U.K. has made certain private equity fund performance data more readily available to a large set of investors.
Nevertheless, computational issues still remain due to several factors. First, private equity investments are substantially more risky and illiquid than other assets. These characteristics make comparisons between the performance of the private equity funds and alternative investment benchmarks a difficult challenge. Second, the ability of some investors to gain access to the asset class may be limited. Third, there is a lack of widely accepted benchmarks for the private equity asset class. This prevents investors from fully understanding the risk, return, and correlation characteristics of private equity investment returns and thus the extent ...
