Benchmarking Private Equity: The Direct Alpha Method

32 Pages Posted: 6 Mar 2014 Last revised: 14 Mar 2014

See all articles by Oleg Gredil

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Barry E Griffiths

Landmark Partners

Rüdiger Stucke

Warburg Pincus; University of Oxford

Date Written: February 28, 2014

Abstract

We reconcile the major approaches in the literature to benchmark cash flow-based returns of private equity investments against public markets, a.k.a. 'Public Market Equivalent' methods. We show that the existing methods to calculate annualized excess returns are heuristic in nature, and propose an advanced approach, the 'Direct Alpha' method, to derive the precise rate of excess return between the cash flows of illiquid assets and the time series of returns of a reference benchmark. Using real-world fund cash flow data, we finally compare the major PME approaches against Direct Alpha to gauge their level of noise and bias.

Keywords: Illiquid assets, excess return, modern portfolio theory

JEL Classification: G11, G12, G23, G24

Suggested Citation

Gredil, Oleg and Griffiths, Barry E and Stucke, Rüdiger, Benchmarking Private Equity: The Direct Alpha Method (February 28, 2014). Available at SSRN: https://ssrn.com/abstract=2403521 or http://dx.doi.org/10.2139/ssrn.2403521

Oleg Gredil

Tulane University - A.B. Freeman School of Business ( email )

7 McAlister Drive
New Orleans, LA 70118
United States

Barry E Griffiths

Landmark Partners ( email )

10 Mill Pond Lane
Simsbury, CT 06107
United States
860-415-4154 (Phone)

HOME PAGE: http://www.landmarkpartners.com

Rüdiger Stucke (Contact Author)

Warburg Pincus ( email )

450 Lexington Ave
New York, NY 10017
United States

University of Oxford ( email )

Park End Street
Oxford, OX1 1HP
Great Britain

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