As an important alternative investment, private equity has attracted more and more investors in recent years. However, due to the lack of liquidity and transparency, reviewing and evaluating private equity investments can be challenging for investors. This article provides an overview of best practices for private equity investment portfolio review, including assessing fund performance, benchmarking to indices, evaluating fund managers as well as risk management.
Assessing private equity fund performance with metrics like IRR
Internal rate of return (IRR) and multiples on invested capital (MOIC) are two key metrics to evaluate the historical performance of a private equity fund. By comparing the IRR and MOIC to the targeted returns and benchmarks, investors can determine if the fund has met the return objectives.
Comparing fund performance to private equity benchmarks
In addition to analyzing a fund’s standalone returns, investors should also benchmark the fund’s performance to appropriate private equity indices based on strategy and vintage year. This allows assessing if the GP has delivered returns better than the peer group median.
Evaluating private equity fund managers with qualitative factors
Aside from returns, qualitative factors related to the fund managers also deserve attention during review. This includes investment strategy, sector focus, deal sourcing ability, value creation plan, ESG policy and team stability. Reviewing these factors can shed light on the GP’s capability of generating sustainable returns.
Managing risks of private equity investments
While private equity promises high return potential, the risks should not be underestimated. Lack of liquidity, high leverage, valuation uncertainty and potential overpayment for assets can all adversely impact PE returns. Investors thus need to pay close attention to risk management practices of GPs when reviewing fund investments.
In summary, a thorough review of private equity fund investments requires assessing both quantitative performance metrics and qualitative factors related to fund managers. Benchmarking to indices and evaluating risks also play a critical role in investment portfolio review.