Risk-Adjusted Returns of Private Equity Funds: A New Approach

This paper introduces a new metric, alpha, to benchmark the performance of individual private equity funds. Our metric is substantially less sensitive to noise in fund cash flows compared to the popular public market equivalent (PME) and its generalization (GPME), while having the same aggregate pricing implications as GPME. For a large data set of fund cash flows, the standard deviation of alpha across venture capital funds is 20% lower than (G)PME. For buyout, PME and alpha are close, but deviate in certain subsamples. Using alpha increases power in regressions involving fund performance and improves performance predictability of future funds.