Wednesday webinar at one: Statistical biases in private equity returns

Private Equity (PE) has grown into a substantial asset class, but there remain major problems with measuring PE fund returns. 

Investors continue to use the internal rate of return (IRR) as a key measure of fund performance. It is well known that early returns of cash can have a substantial impact on fund IRRs, but the magnitude and causes of this effect have not previously been systematically analysed. 

In this session Simon Hayley will demonstrate how the IRR is affected by two biases: a convexity bias, and a “quit-whilst-ahead” bias arising because the returns on PE projects are correlated with their durations. 

Learning outcomes

• Understand how PE fund IRRs differ systematically from the returns quoted on liquid investments, and how this difference can be quantified.
• Understand the impact that this might have on portfolio allocation decisions.
• Explore unbiased alternative performance measures.