What’s your approach to questions like:
- Was the decision to allocate capital to privates a good one?
- Did we select good managers?
- Within our private investments, did we make good allocations?
As Cambridge Associates says: “[there is no] single “right” measure for private investment performance”. I have #AFewQuestionsAbout venture capital returns and performance measurement.
Do you favor the most well-known approach of judging funds by vintage year and TVPI, DPI, and IRR?
While TVPI, DPI and IRR are perhaps “easier” to calculate, they don’t help with comparisons to the public market or many other asset classes.
And “the mechanics of the IRR calculation thus provide an incentive for GPs to aggressively exit portfolio companies early in a fund’s lifecycle to “lock-in” a high IRR. A related problem, although smaller in magnitude, is that IRR fails to take into account the LP’s cost of holding capital until it is called for investment.”
On the asset class level, how do you demonstrate to your investment committee that investing in venture capital funds has a higher return than the public markets to compensate for risk, management overhead and illiquidity?
As the 2012 Kauffman Foundation famous report says:
“VC returns haven’t significantly outperformed the public market since the late 1990s, and, since 1997, less cash has been returned to investors than has been invested in VC.”
“The average VC fund barely manages to return investor capital after all fees are paid.”
For overall VC asset class performance, do you agree:
“mPME analyses confirm Cambridge Associates view that, over the long run, many private investment strategies (including private equity and venture capital) have outperformed their public market alternatives.”
What is your experience with PMEs like Cambridge’s mPME, Direct Alpha or KS-PME for individual manager performance management?
https://www.cambridgeassociates.com/research/a-framework-for-benchmarking/
https://pitchbook.com/blog/introducing-pitchbook-benchmarks
In your view, how important is vintage fund comparison?
Being able to adjust in some way for similar market conditions or what was opportunity cost matters. That said, vintage year can be gamed and does not perfectly reflect similar market conditions.