Insights and opinions from an internationally recognized authority on investment performance measurement
Thursday, January 6, 2011
Private equtity attribution
I'll be teaching a class for a client later this month who asked for some specific topics to be included, one of which is private equity attribution. The challenges with private equity are:
They typically don't have indexes, so we can't use relative attribution
They use IRR, not TWRR, since the manager controls the cash flows.
And so, what is a private equity manager to do if they want attribution? The answer is simple: absolute attribution (aka contribution)! We can utilize IRR at all levels and reconcile to the overall return. We calculate our sector returns, for example, using IRR; calculate their weights, taking cash flows into consideration; and simply multiply the weights by the individual returns. Their sum should tie out to the overall return. For example:
We can see how each sector contributed to the overall return. And just like hedge fund attribution, we can slice up our private equity portfolio in countless ways (e.g., by industry, subsector, country). Does this not make sense? Thoughts?
is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html
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