Front Line Newsletters
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MIRR: getting more satisfaction
One of the foundations of modern theoretical physics is the Uncertainty Principle, first proposed in 1927 by German physicist Werner Heisenberg. Put in its simplest terms, it states that it is impossible to know the exact speed and position of an atomic particle simultaneously. The more one knows about one measurement, the less one can know about the other. Among its many implications, the Uncertainty Principle places fundamental limits on human knowledge-at the sub-atomic level, anyway. Private equity investing has its own version of Uncertainty: measuring and comparing the performance of funds. This article explores the difficulties and (dare I say it) uncertainties of applying the traditional IRR measurement to the assessment of private equity funds. More importantly, we also present a new alternative to IRR that is driven Pevara’s unique capabilities and offers a more accurate and useful perspective on fund performance.
A closer look at venture capital returns (2/2)
This is the second of a two-part series that explores the possibility of predicting, through analysis, a venture capital bubble within venture capital (VC) sector of the alternative assets market. As I mentioned last month, VC is an enormous and complex business, making any attempts at prediction a particularly difficult challenge. Fortunately, the capabilities within Pevara can make such analyses both revealing and useful. Part one revealed that geographical factors of a potential bubble might result in regional differences of scale, of timing and with different consequences. We conclude the series here by exploring four different analyses in an attempt to understand the cycles of VC bubbles and the possibility of revealing the signals of potential future bubbles.
A closer look at venture capital returns (1/2)
The term “bubble” does not typically cause alarm. At least, it doesn’t do so when used outside the world of finance and investing. The term generally conjures scenes of tranquility; bubbles rise gently through water and burst harmlessly on its surface. For investors, though, bubbles are a very different and often troubling matter. The more ominous synonyms for the term, like correction, contraction and crash (no one wants to crash anything or be in a crash!) make the preference for “bubble” clear. But, it’s all really the same: the surge in prices of particular commodities, assets, or securities that continues until confidence in the trend ceases, resulting in a precipitous selloff that bursts the bubble. History tells us that bubbles tend to follow human nature and may be impossible to prevent. However, we may be able to predict them with advanced tools like Pevara. In this Issue of Front Line, we present the first of a two-part series that will explore the possibility of a venture capital bubble within venture capital (VC) sector of the alternative assets market. Although VC is an enormous and complex business, making any predictive analysis a daunting task at best, the capabilities within Pevara can make such analyses uniquely revealing. Part one of our exploration looks at geographical factors that may be at work. Part two will explore performance cycles for predictive insights.
Assessing risks in private equity (2/2)
This is the second of two newsletter issues that explore and compare different methods of measuring risk. All of them have their strengths and limitations and none of them are individually capable of providing all of the insight needed by limited partners to perform an adequate assessment of risk-for a portfolio or for fund managers. Naturally, all methods require data, the quantity and quality of which can spell the difference between insight and ignorance. Last month, we looked at the benefits and limitations of the standard deviation and found that while it revealed much about the distribution of returns, it offered almost no insight into loss assessment. In this issue, we look at histograms as a tool for assessing loss. Ultimately, each method tells its own story and it is up to the individual LP to weave the various stories into a single coherent picture.
Assessing risks in private equity (1/2)
Risk is a recurring theme in this newsletter, just as it is in so many discussions of private equity investing. Investors and managers all seek to maximize returns and minimize risk. In a previous issue, we identified some of the key risks and began to differentiate the perception of those risks from their realities. In this issue, the first of two on the subject, we begin a discussion of specific risk assessment methodologies. The importance of understanding and measuring risk cannot be underestimated, since the consequences of overstating risk and underestimating it are often the same: lost returns. The great Renaissance artist Michelangelo might as well have been talking about private equity when he said “The greatest risk to man is not that he aims too high and misses, but that he aims too low and hits.”
Benchmarking the benchmark
Benchmarking is an ancient practice, going at least as far back as the ancient Egyptians, who used a fixed reference point from which buildings and parcels of land were measured. Simply put, it was, and remains, a standard against which all manner of things can be measured. Beginning in the 1970s, its meaning broadened to include performance measuring in business and technology. Since then, benchmarks have come into wide use by investors and managers of alternative asset funds to gauge both human and financial performance. The big question, however, is how to determine the merit of a fixed standard, or benchmark? How does one benchmark a benchmark? This edition of Front Line explores that question in detail as it pertains to assessing private equity funds and GPs. As you’ll see, not all benchmarks are created equal.
Secondary investments: an obvious choice
Secondaries are very popular and are even trading at a premium. But, might they be too good to be true? Pevara might just be the ideal tool for sorting out all the myths and truths about secondaries, and in this edition of Front Line, we’ll see what insight and clarity Pevara can offer on this topic. To all our readers, please send us your ideas for interesting topics and future articles. Tell us what’s most important to you. As previously mentionned, we want to make this process easy and convenient. So, we’ve established a new email account exclusively for this purpose. Send your ideas, suggestions and requests to email@example.com.
Beyond returns: the delicate question of risk in private equity
There is risk everywhere in our lives and in every one of our business and investment endeavors. The world of alternative investment is no exception. But, as we’ll see in this edition of Front Line, private equity has very specific risks, but is also affected by macroeconomic factors, as are all investments. Assessing and mitigating alternative investment risk requires good information and advanced analysis, both of which, fortunately, are hallmarks of Pevara. This edition will explore some of these risks, attempt to sort out their causes and offer suggestions for assessment.
Real assets, real performance
Real estate has long been considered a reliable asset class for alternative investors seeking lower risk and consistent returns. With the expansion of the private equity market and growing influx of investment cash, however, private real estate and private real estate infrastructure has become a much more complex investment environment. Consequently, the risk and performance calculations for funds in this asset class require better insight than ever before. In this issue of Front Line, we use Pevara data to explore the true performance of real assets in a rapidly evolving market and test several strategies aimed at balancing risk and returns in different regions.
A Glimpse at Private Debt Returns
Warren Buffett, the Oracle of Omaha, famously said, “Risk comes from not knowing what you’re doing.” That wisdom applies perfectly to the relatively recent strategy of private debt investing, where reliable data is nearly nonexistent. In this issue of Front Line, we use Pevara data to examine the historical performance of three proxies with an eye toward finding useful risk metrics with which investors can make informed decisions.
A Closer Look at LBO Returns
In this issue of Front Line, we look below the surface of the leveraged buyout (LBO) market to reveal some of the important dynamics that have been obscured by the size and success of LBOs. Rather than being an investment monolith, we will see that there are multiple segments within the market, each with its own balance of risks and returns, requiring thoughtful decision-making by LPs. Please enjoy this issue of Front Line, share it with your colleagues and feel free to respond to our articles with comments of your own. Thank you.
Funds-of-funds: sources of value creation
Welcome to our June issue of the FrontLine newsletter. After exploring PE performance in Emerging Markets, we now focus on Fund of Funds’ today environment in the private equity market. The focus of this newsletter is to explore the intrinsic value of Fof – and, to the extent possible, of co-investments – for LPs.
What is the forecast for Emerging Markets PE
Welcome to the May 2014 issue of the Front Line newsletter. In this issue of our newsletter, we take up the problem of analyzing PE performance in emerging markets: having more and better data is ideal, but not always possible. So it is with emerging markets. Here, we discuss methods that allow better forecasting, despite the inherent limitations of the market.
When I say ‘performance’, am I PICC-king your curiosity?
Welcome to the April 2014 issue of the Front Line newsletter. All investors seek GPs with the best potential for high performance. But, determining that potential involves predicting future performance; a task fraught with uncertainty. The simple answer is to examine past performance as a key predictor. In this issue, we examine the limits of relying on past performance and explore a more reliable indicator that can help LPs gain confidence in their search for the best managers.
Handling cycles, waves and volatility of performance – March 2014
Welcome to the March 2014 issue of Front Line. In our last issue, we mentioned the cycles of performance, fund raising and investments influencing the overall portfolio performance of our mock pension fund. This month we will continue that line of inquiry by focusing on private equity benchmarking continuity, exploring asset allocation by LPs and private equity business cycles.
Benchmarking a Pension Fund Portfolio with Pevara, Part 2 – February 2014
Welcome to the February 2014 issue of The Front Line newsletter. This month has been an especially busy one for eFront with the launch of our new portfolio monitoring solution, FrontPM The topic of our previous issue received a great deal of interest, so this month we will continue that line of inquiry by focusing on private equity benchmarking continuity. In the March issue of The Front Line newsletter, we will dive even deeper by exploring asset allocation by LPs and private equity business cycles.
Benchmarking a Pension Fund Portfolio with Pevara, Part 1 – January 2014
Welcome to the first 2014 issue of The Front Line newsletter, a periodic report that will feature technical content by both internal and external contributors. This issue focuses on Pevara and private equity benchmarking. Subsequent issues will deal with a wide variety of topics that are important to PE professionals. We hope you’ll find this and future issues enlightening and valuable. Of course, we welcome and encourage commentary from our readers.