Benchmarking Private Equity: The Direct Alpha Method

35 Pages Posted: 3 Aug 2022 Last revised: 23 Jan 2023

See all articles by Oleg Gredil

Oleg Gredil

Tulane University - A.B. Freeman School of Business

Barry E Griffiths

Ares Management Corporation

Rüdiger Stucke

Warburg Pincus; University of Oxford

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Date Written: December 28, 2022

Abstract

We propose a simple and intuitive measure of the annualized excess return of investments in private equity (PE) funds, as well as in similar vehicles that hold hard-to-value assets. Our ‘Direct Alpha’ method is well-founded in theory and dominates the existing approaches to convert fund lifetime returns into inputs amenable for portfolio-wide optimization. Existing Public Market Equivalent (PME) approaches are either heuristic or involve significant approximation errors. Using real-world PE fund cash flow data, we juxtapose Direct Alpha against nearly all PME methods that have been in broad use.

Keywords: illiquid assets, private equity, performance evaluation, 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 (December 28, 2022). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4174563 or http://dx.doi.org/10.2139/ssrn.4174563

Oleg Gredil (Contact Author)

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

7 McAlister Drive
New Orleans, LA 70118
United States

Barry E Griffiths

Ares Management Corporation ( email )

3963 Maple Avenue, Suite 170
Dallas, TX 75219
United States
214-273-0154 (Phone)

HOME PAGE: http://https://www.aresmgmt.com/

Rüdiger Stucke

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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