Performancemåling af private equity fonde

Jonas Hauschildt Aagaard

Student thesis: Diploma thesis


The purpose for this thesis is to investigate if Private Equity Funds has outperformed benchmark. Performance measurement for PE funds is a difficult exercise. Private Equity differ from public equity in many aspects, making it difficult to compare the returns from these two. Due to an uneven information distribution, the ability of managers becomes extremely relevant for private equity, while the illiquidity makes it intangible for investors. The data for this analysis is distributed by Preqin, and is based on funds around the world. MSCI World Index is set as benchmark for this performance analysis. IRR and PME index is used to compare the total return of PE funds and benchmark. To ensure a correct comparison, the result needs to be risk adjusted, using CAPM, Treynor ratio and Jensen's alpha. CAPM is based on the assumption, that the market is total-diversified, meaning it only contains systematic risk. This makes estimating beta an essential part of the thesis. In this analysis beta is determined to 1.15, based on previous studies, observations and mathematical simulations. To assess whether the PE funds have delivered an over-normal return, Jensen's alpha is calculated. Jensen's alpha shows whether an asset has over or under performed in relation to its risk. If the result of Jensen's alpha is above 1.0, the current portfolio is considered to have provided an above-normal return. The core data obtained via Preqin contains return data from PE buy-out funds worldwide, and stretches from 2000 to 2014. The analysis is based on the assumption that the data contains positive bias, according to the theory around selection bias and liquidations bias. The structure of the analysis can be divided into three parts. The first part involves a comparison of the private equity fund performance in relation to benchmark. The second part is making a similar comparison, however, after a risk adjustment of the systematic risk. The final measure contains an estimate of a specific risk premium (alpha) added to the PE fond performance. This risk premium often covers factors such as increased leverage in business, illiquid investment and stability premium. Alpha is based on inspiration from previous studies, and will be fixed at 3% p.a. Jensens alpha is calculated to 1.72% for the analysis period and therefore conclude that PE funds have delivered above-normal returns, in terms of expected return for the investment. Futhermore Treynor Ratio is calculated to 6,76 % highter for PE funds than for benchmark, meaning PE funds perfomer better per each unit of systematic risk.

EducationsGraduate Diploma in Finance, (Diploma Programme) Final Thesis
Publication date2018
Number of pages81