The Many Theoretical Deficiencies of Performance Evaluation in Private Equity

Abstract

In private equity, the skill of a general partner is conventionally gauged using the internal rate of return, a quartile or peer comparison, and a public market equivalent analysis. However, none of these methods reflect characteristics of specific value-creating manager activities, such as company growth or the use of leverage. The value bridge, focusing on sources of value, is promoted by some within the industry as a performance evaluation tool to fill this information gap. In this paper, we discuss theoretical deficiencies of the value bridge and show that it is inadequate for investment decision support.

Keywords: Private Equity, Attribution, Manager Evaluation, Value Bridge

JEL Classification: G23