Measuring Performance within the Private Equity Industry

Previous academic literature examining the performance of private equity funds has documented that the average private equity fund has failed to outperform public equity markets. This underperformance coupled with a greater risk-return trade-off has failed to discourage investment in private equity markets. In fact, private equity firms have enjoyed record amounts of fund raising over the past several years. This phenomenon has been characterized as a puzzle and its investigation within the academic literature has only just begun. Using a unique and current data set covering private equity returns and their underlying cash flows, we examine performance measurements of private equity funds in the context of their relationships with one another and with public markets; as well as, examine the characteristics of the funds and their managers that drive these relationships. Our findings suggest that private equity investors are partially motivated by misinterpreted performance measurements and that this misinterpretation is compounded by fund reported residual values. These findings have important policy implications for both private equity fund managers and investors