Abstract:

This paper examines the historical risk-adjusted performance of private funds across diverse asset classes and geographies using the most comprehensive and current dataset to date. We utilize a spectrum of performance metrics, progressing from simple multiples and internal rates of return (which lack risk adjustment) to risk-adjusted metrics like the public market equivalent (PME) and direct alpha, and finally to the most sophisticated econometric methods. At a high level we find that buyout funds, private debt, and infrastructure funds have tended to perform well on a risk-adjusted basis. In contrast, real estate funds and venture capital funds have had more mixed performance, and sometimes negative excess returns. Contrary to common opinion, funds based outside North America tend to perform well on a risk-adjusted basis when benchmarked against public market indices outside North America. Taken together, our findings highlight that proper benchmarking and risk adjustment can have a first-order effect on inference about historical performance. For example (and consistent with prior literature), U.S. buyout funds have outperformed U.S. venture capital funds on a risk-adjusted basis even though buyouts have lower unadjusted performance. Highlighting the tension between methodological complexity and practical accuracy, we find that PMEs and direct alphas, combined with well-constructed benchmarks, adequately identify top-performing funds. In addition, the marginal benefit of more complex models is limited, suggesting that investments in benchmark development are likely more impactful than additional advancements in econometric techniques.

Authors:

Gregory Brown, UNC Kenan-Flagler Business School
Christian Lundblad, UNC Kenan-Flagler Business School
William Volckmann, Institute for Private Capital