by Andrés Ramos, Content Marketing Specialist – eVestment Private Markets
A New Way to Understand PE performance
Internal rate of return (IRR) and total value to paid in (TVPI) are without question key benchmark measures of performance for private fund managers. These performance measures have demonstrable value with each offering an important viewpoint for understanding a private markets fund’s performance.
Where these measures fall short, however, is that they only measure performance from inception. They do not help investors understand how funds are performing over any other period of time. Fund managers may argue that shorter- or near-term performance is not relevant in the private markets because of the long investment period of private markets funds, but what this argument fails to account for is the ever-growing desire for data from institutional investors.
Private markets investments are just a piece of the pie for institutional investors and horizon returns help them understand their recent private markets activity, and show it in context with the other assets in their portfolio. This is especially important in a year as volatile as 2020.
Demand for PE Horizon Returns is Already Here
Like the push for benchmarking and PME, the demand for horizon returns in the private markets has been driven by investors seeking greater transparency into their portfolios. In a 2019 survey by eVestment Private Markets, 43% of institutional investors rated the importance of horizon returns as moderately or very important (see chart at right). Let’s take a look at PE horizon returns in practice by reviewing a few performance reporting documents from institutional investors.
Below are two samples of horizon returns in private fund performance reporting. Alaska Retirement (left) is using horizon returns in conjunction with PME to help add context to their portfolio performance. At right is a recent Michigan State PERS performance update for their Real & Opportunistic Portfolio. You can see that horizon returns are the primary method used to measure and present performance. So whether fund managers are prepared to provide horizon returns or not, it’s clear that there is already demand for the metric from their institutional investors.
Calculating horizon returns with TopQ
Multi-Period Analysis, one of the five modules in our portfolio analytics tool, TopQ, is specifically designed to handle cross period calculations like horizon returns. Understanding how a fund has performed in more short-term time periods is as simple as adding the “Horizon Returns” widget to your Multi-Period Analysis dashboard.
In the example below you can see the horizon returns for our sample fund, BCP III, over the date range of June 30, 2014 to June 30, 2019. The screenshot also demonstrates the two calculation methods for horizon returns offered by TopQ, one the traditional geometric approach (Modified Dietz) and the other using our proprietary IRR engine (Cross Period IRR).
Horizon returns are just the tip of the analysis iceberg with regards to Multi-Period Analysis. Other uses for MPA include:
- Assessing the evolution of NAVs, IRRs and other deal attributes over time
- Determining market movements versus deal specific movements
- Calculating the uplift at realization over last period valuation
- Identifying the biggest movements and understanding their impact on overall performance
The full capabilities of our MPA module help you get the answers you need to internal and external stakeholders questions more quickly, and provide access to additional insights to help you better understand how recent changes impact the value of your funds and deals.