Does the choice of performance measure shape the appraisal of private equity funds?

Abstract

Conducting an empirical study on cash flows of 71 private equity funds, spanning the vintages 1990 to 2008, we compare the two most common performance measures, IRR and TVPI, to four proposed alternatives. We also document cash flow characteristics that complicate performance measurement. Our findings determine that funds rank differently depending on the measure we employ. However, rank correlations among all measures suggest that the differences are fairly small, and that deviations further decrease when excluding young funds. Funds identified as top quartile by one measure are likely to receive similar appraisals by other measures, but performance is neither robustly, nor fully described by only one measure. The alternative measures better align the interests between the general and limited partners, and contribute to separate skill from fortunate timing. Limited partners should therefore use several measures in the appraisal of fund performance.