Truth About Private Equity Performance

O. GOTTSCHALG, L. Phalippou

Harvard Business Review

December 2007, vol. 85, n°12, pp.17-20

Departments: Strategy & Business Policy, GREGHEC (CNRS)

The article reports that calculating the performance of private equity funds with a modified internal rate of return (M-IRR) results in a more accurate performance yield or true return. The problem with the internal rate of return (IRR) method is that IRR overstates the fund's performance and misrepresents its relative ranking, which misleads investors about the reinvestment of cash proceeds and makes it difficult to compare fund managers. An example is given showing how M-IRR better represents the rate of return for private equity funds.*INVESTMENT analysis*EXPECTED returns*INADEQUATE disclosure*EARNINGS trends*HIGH yield investments*REINVESTMENT*FINANCIAL performance*INTERNAL rate of return*RETURN on assetsRANKING & selection (Statistics)PRIVATE equityRANKING