Proposing a New Metric: Private Fund Duration

 

Rafael Castilla, Director of Investments and Structuring, University of Michigan
Felicia David-Visser, Senior Manager of Investments, University of Michigan
David Brophy, Professor of Finance and Director of the Center for Venture Capital and Private Equity Finance, University of Michigan


Key Findings:

  • The authors propose a new metric, terming it private fund duration (PFD), with three components, to assist investors in the analysis of the duration of private funds and investments.

  • With the longstanding return-oriented metrics of the multiple on invested capital (MOIC) and the internal rate of return (IRR), PFD provides a comprehensive summary of the cashflow characteristics of a fund, particularly with respect to liquidity. This should permit investors and researchers to perform heretofore unperformed analyses and comparisons relating to the duration of private investments.

  • Like the MOIC and the IRR, PFD is fundamentally a historic evaluative metric. However, the concept of net asset value similarly can be applied to PFD to produce interim estimated PFD components. The single-number metric Q of a private fund is defined: the amount-weighted average time capital remains invested, or average holding period, equal to PFDz - PFDx.

The Online Supplement illustrates one application of PFD using Burgiss data in different asset classes for different vintages: creating benchmarks for PFD. The data is derived from the Burgiss private fund data universe for the United States region and the period and vintages from January 1, 1990, through December 31, 2020.

 
Ruby Atwal