Performancemåling af nordeuropæiske Private Equity Buyout-fonde i perioden fra 2003-2013

Frederik Dalgaard Jensen

Student thesis: Diploma thesis


The purpose of this academic assignment is to investigate the performance of Private Equity Buyout funds (BO) of Northern Europe in the last ten years. The performance is measured against the public equity benchmark - Nasdaq Composite total return. The asset class are still relatively young in Northern Europe and has some unique characteristics. One feature is the very irregular timing of cash flows, and a consequence of this is, that PE relies on measures of returns in Internal Rate of Return (IRR), which are not standard in other asset classes. I use a method called Public Market Equivalent (PME) to compensate for this. The PME method creates an IRR for the public equity benchmark by replicating the cash flows from the funds. The performance of the benchmark is after the calculation in IRR and comparable with the return of the BO-funds. This performance measurement is made of data obtained from Thomson Reuters (TR). The data contains the pooled IRR from 52 different Buyout funds. The dataset has same limitations, as TR doesn’t want to provide information about cash flows to and from the funds. TR has calculated the PME and this gives information on the outcome of the calculated IRR for the benchmark. In this assignment the performance is adjusted for risk and I use a variety of approaches drawn from the academic literature. I use the standard Capital Asset Pricing Model (CAPM), the Jensen´s Measure and Treynor’s-index to calculate the impact of Private Equity’s increased leverage. And I analyse and estimate the impact of illiquidity in Private Equity. By adjusting for the systematic risk, assuming that beta is equal to 1,3 both the Treynor- and Jensen-index exceeds the benchmark. The Jensen-index shows an outperformance of 1.01 pct. p.a. (IRR) relative to the benchmark. This can be interpreted as the break-even alpha to compensate investors for the cost of long-term illiquidity and other frictions. The unique characteristics of the asset class make it difficult to measure the risk in practice, and it remains controversial whether this outperformance is a consequence of a higher risk due to the illiquidity of the asset and positive bias in the data.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
Publication date2014
Number of pages90