In our book, Inside Private Equity (Wiley, 2009), we lamented the absence of quality data on and about the private capital markets. Of course, we are doers, not complainers, and we had long been talking to and working with our clients to help address this information gap. Private iQ is the public face of this effort, but behind the scenes, there is a lot of work with the academic community.
One of the first results of this collaboration is this paper, first released in draft form last year, which helped rewrite the performance history of the asset class. From its summary:
We present evidence on the performance of nearly 1400 U.S. private equity (buyout and venture capital) funds using a new research-quality dataset from Burgiss, sourced from over 200 institutional investors. Using detailed cash-flow data, we compare buyout and venture capital returns to the returns produced by public markets…
We find better buyout fund performance than has previously been documented. This in part reflects recently discovered problems with data provided by Venture Economics, upon which several previous studies had relied. Average U.S. buyout fund performance has exceeded that of public markets for most vintages for a long period of time. The outperformance versus the S&P 500 averages 20% to 27% over the life of the fund and more than 3% per year. Average U.S. venture capital funds, on the other hand, outperformed public equities in the 1990s, but have underperformed public equities in the 2000s. Using individual fund data, we explore the relationship between absolute measures of performance – internal rates of return (IRRs) and multiples of invested capital – and performance relative to public markets.
The authors, Robert S. Harris of the University of Virginia, Tim Jenkinson of Oxford University, and Steven N. Kaplan of the University of Chicago, revise earlier findings and cast the industry performance in a much better light. Importantly, this paper helps validate our approach to data quality.
The paper begins:
Despite the large increase in investments in private equity funds and the concomitant increase in academic and practitioner scrutiny, the historical performance of private equity (PE) remains uncertain, if not controversial. The uncertainty has been driven by the uneven disclosure of private equity returns and questions about the quality of the data that have been available for research. While several commercial enterprises collect performance data, they do not obtain information for all funds; they often do not disclose, or even collect, fund cash flows; and the source of the data is often obscure, resulting in concerns about biases in the samples. Furthermore, some data are only periodically made available to academic researchers.
In this paper, we use a new research-quality data set of private equity fund-level cash flows from Burgiss. We refer to private equity as the asset class that includes buyout funds and venture capital (VC) funds. We analyze the two types of funds separately. The data set has a number of attractive features that we describe in detail later. A key attribute is that the data are derived entirely from institutional investors (the limited partners or LPs) for whom Burgiss’ systems provide record-keeping and performance monitoring services. This results in detailed, verified and cross-checked investment histories for nearly 1400 private equity funds derived from the holdings of over 200 institutional investors. Using these data we reassess the performance of private equity funds, in absolute terms and relative to public markets. Our results are markedly more positive for buyout funds than have previously been documented.
We urge you to read this paper and comment on its findings.