COLLEGE PLANNING | ESTATE PLANNING | INSURANCE | INVESTING | PORTFOLIO SPOTLIGHT | REAL ESTATE | RETIREMENT | TAX PLANNING
New Yardsticks For PE Investing
As private equity becomes more popular, we’ ll need better ways to measure its performance.
By Susan Mangiero
YOU CAN’ T MANAGE WHAT YOU CAN’ T MEASURE accurately, and that’ s a problem for investors in private equity. These investors must be able to access and understand meaningful performance numbers, something that’ s become more challenging in the current environment. Private equity is dealing with backlogs as liquidity events take longer and deal flows remain more sluggish in the years following the Covid-19 pandemic. The short-term returns of PE have also been lower than expected, trailing the S & P 500, and compliance costs have increased.
So there’ s more at stake and investors want to know what they are comparing.
James Davidson is a senior advisor to multiple family offices and a specialist in special needs trusts.“ My clients have an appetite for private equity but, unlike institutional investors with clout, they generally have limited access to fund managers, so they need standardized comprehensive performance data,” he says.
Private Equity Performance Measurement
Evaluating private equity is both an art and a science— a complex task that requires care on the part of investors and advisors, and there’ s no one-size-fits-all approach that will help them with due diligence. Without that, they would need a comprehensive examination of quantitative and qualitative investment factors and a willingness to ask questions about how reported numbers are assembled.
One of the common quantitative metrics that people look at when they’ re evaluating a private equity investment is its internal rate of return— the discount rate that makes the net present value of all cash flows equal to zero. Another metric is the investment’ s total value to paid-in capital— a figure, often expressed as a multiple, that reflects the ratio of the sum of distributed capital plus unrealized value to the total amount that investors have put in.
Next is distributions to paid-in capital, which shows how much money has been returned to an investor versus what was contributed. And finally, there’ s the multiple on invested capital, another ratio that adds distributed capital plus unrealized value and compares that to invested capital. Total capital to paid-in value and the multiple of invested capital converge to the same number once a fund is fully funded and deployed.
The list of qualitative factors is big. It typically includes a fund manager’ s philosophy, the experience of the team, its decisionmaking structure, its investment process, its industry concentration, its risk management policies, the amount of leverage it uses, the length of time it’ s been in business, valuation protocols, and details about any lawsuits or compliance violations.
At a minimum, any investor looking into these opportunities needs to understand the relevant contractual obligations and rights of the limited partnership arrangement. Jeffrey Lauterbach, an advisor to several prominent family offices, says,“ It’ s about someone’ s character. Good ethics goes well beyond checking off boxes.”
Decoding IRR Numbers
The internal rate of return, although widely used, can sometimes be misleading. Its calculation assumes that all interim cash flows are reinvested at the same rate of return despite the reality
30 | FINANCIAL ADVISOR MAGAZINE | JANUARY / FEBRUARY 2026 WWW. FA-MAG. COM