Performance Measures in Private Equity

Abstract

Performance measures in private equity are essential for evaluating the financial performance of these funds. Three commonly used measures are (1) multiples, such as Total Value to Paid-In capital (TVPI) or Multiple on Invested Capital (MOIC), which represent the ratio of cash inflows to outflows; (2) the Internal Rate of Return (IRR), defined as the discount rate that makes the cash flow's net present value equal to zero; and (3) the Public Market Equivalent (PME), either viewed as an Index Comparison Method (ICM) or a Stochastic Discount Factor (SDF) method. Each measure has its own advantages and disadvantages, so it is common to use a combination of these methods to obtain a more comprehensive understanding of a private equity fund's performance.

Keywords: Private Equity, Performance, Total Value to Paid-in Capital (TVPI), Multiple on Invested Capital (MOIC), Internal Rate of Return (IRR), Index Comparison Methods (ICM), Public Market Equivalent (PME), Stochastic Discount Factor (SDF)

JEL Classification: G11, G23, G24