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Benchmarks for private equity fund investment

This report by Wilshire Associates presents a new methodology for measuring return and risk for private equity investments -using buy-out investments as an example. This allows investors to create useful and risk-adjusted performance benchmarks.

Investing in the private equity fund market involves a unique set of skills. The decision tools commonly used to determine asset allocation, measure risk and evaluate performance of public equities and bonds are very difficult to apply to private equity. This makes the benchmarking of portfolios especially complex.

Current evaluation methods for funds rely on making comparisons with other funds that have the same starting date. This can be unreliable as funds vary dramatically in their approach to investing and underlying portfolios are not always similar. Also, classifying funds by start date underestimates the impact of future cash flows - the timing of which are fundamental to the performance of the fund.

There is, however, a solution. By re-engineering and formulating the common indexes used in the equity and bond markets, it is possible to reflect the investment characteristics of private equity funds and incorporate the business and financial risks into a tailored index. This type of yardstick provides investors with a credible tool with which to assess the expected return of potential investments.

Such tools are likely to encourage the promotion of private equity as an asset class. Although the report uses buy-out funds as the primary example, the same methodology can be applied to all types of private equity funds.

Click here to view full PDF report (389kb)

Wilshire Associates is a full-discretion fund of funds manager, with commingled and segregated accounts managed for clients throughout the world.  The firm's approach is to construct concentrated portfolios comprising of only high quality fund opportunities, with a focus on superior returns rather than broad (indexed) exposure.

Wilshire offers investors the ability to invest in a global private equity program through separate accounts or co-mingled funds. Wilshire has raised four of fund of funds. Each fund invests in the US and Europe with the ability for clients to specify their geographic preferences. Additionally, each fund follows Wilshire's time tested strategy of focusing on middle market buyouts and early stage venture capital that have provided Wilshire with top quartile performance.

Daniel E Allen CFA is a managing director & principal at Wilshire Assocaites. He sources and conducts due diligence on investments in Europe and is a member of the Private Markets Group Investment Committee. In addition, Mr Allen manages the Private Market Group's European office. He has over 17 years of global investment experience.

Thomas K Lynch CFA, JD is a managing director and principal at Wilshire Associates. He sources and conducts due diligence on investments in all private market sectors and regions and is a member of the Private Markets Group Investment Committee. In addition, Mr Lynch manages global operations for the group. He has 18 years of investment experience including pension and private markets consulting, portfolio management, and security analysis.

Erica C Bushner, CFA, CPA, is a managing director and principal at Wilshire Associates. She sources and conducts due diligence on investments in all private market sectors and regions and is a member of the Private Markets Group Investment Committee. She has 18 years of investment experience.

CONTACT INFORMATION

DANIEL ALLEN
Managing Director
Wilshire Associates
Prins Hendriklaan 43
1075 BA Amsterdam
Phone (31) 20 305 7530
e-mail dallen@wilshire.com

© Wilshire Associates 2001