Capital Prayerogen Case: A smart way to assess PE returns

In the last two decades, investors have invested capital into private assets, which have been drawn from the promise of higher returns compared to public markets. But as Ludovic Falipau highlights the “The Tireran of IRR”, many investors have started questioning whether private equity (PE) actually lasts to the internal rate of returns (IRR) data.

An important reason for mismatch is Partial investmentUnlike public property, PE funds gradually call capital and return it to stages, meaning that a large part of the committed capital can sit in vain for years. This reduces the benefit of the investor, even the IRR remains high.

IRR only reduces the problem by considering the capital deployed by the fund manager, not the entire amount contributed by the investor. As a result, it eliminates performance and hides the drag of unused capital. To understand what investors really earn, we need a metric that catch this weakening.

Enter Capital Personogen Factors (CDF)-a simple yet powerful tool that measures how much the paid capital was kept to do to do. It shows how much was not only used, but also how much benefit was there Lost Due to partial investment.

The CDF shows the impact of partial investment show which part of the payment-in capital was actually used to generate returns. Because the profit is proportional to CDF, it also indicates how much potential returns were confiscated due to passive capital.

What does CDF tell about the impact of partial investment on real PE funds? This indicates that this is very important, as the CDF of PE funds rarely exceeds 60% in their lifetime and usually falls between 15% and 30% at the time of liquidation.

One side effect of partial investment is that IRR becomes incredible to compare performance: funds with the same IRR but different capital can be very different from the same capital paid in regulation levels. In contrast, CDF investors allow IRR to calculate a fund, the benefit of another fund or a single capital will need to match a liquid property.

Capital system factor

The CDF shows a fraction of the amount paid by the investor deployed by the PE Fund Manager. It can be calculated at any time to know the IRR, TVPI and duration of the fund.

The total value for the payment-in indicator on TVPI time T is the IRR has an internal rate of return since the installation expressed on an annual basis, and the number of time has been eliminated till time. For example, 12 years later an IRR = 9,1% per year and a PE fund with a TVPI = 1,52x:

What does this CDF figure mean? This means that over a period of 12 years, only 28.2% of the capital paid by the investor was used to generate benefits by the fund manager. In other words, more than one dollar in four was used to produce money.

The above IRRs and TVPI figures were compiled by a huge and reputed PE fund database by Falipau. IRR = 9.1% per year represents the middle IRR for PE funds in the database, and TVPI = 1.52x, their average TVPI. The duration reflects the average 12-year-old life of PE funds. CDF = 28.2% is thus representative of the middle PE fund on the date of liquidity.

How does CDF affect investor? The effect of partial investment is enough, as the profit decreases in proportion to CDF, as shown by the profit equation:

Dugan_Tea The total amount that has been paid to the investor for time and to get_TeaProfit on time. Thus, the middle PE fund reduces its profit by the factor of 0.282 due to partial investment.

What is the specific limit of CDF for PE Fund? It varies in the life of the entire fund. We found that it rarely exceeds 60% during its lifetime and falls somewhere between 15% to 30% in liquidation. Venture Capital Fund and Fund’s primary funds have more CDFs than purchases funds, as illustrated in Figure 1.

Figure 1.

Who controls CDF? The CDF is decided by the PE Fund Manager, as the manager decides on the time of flow alone. If the manager calls the capital first, the CDF increases. Payment also increases if the payment is postponed. If the entire amount is called initially and both capital and profit are repaid at the end of the measurement period, the CDF is equal to 100%.

Compare returns

Two funds are equal in terms of performance, when they have generated the same profit from the amount paid. This formula expresses this equivalent criteria by giving IRR that Fund A must have the same benefit as the same amount, which is out of the same amount of the same amount.

Let’s see an example:

• Fund_(A): DUR = 12 years; CDF = 20.0%; IR =?
• Fund_(B): DUR = 12 years; CDF = 28,2%; IRR = 9,1% per year.

What should IR fund for your performance to be equal to fund B?

Thus, Fund A must have an IRR = 11.26% per year for its performance to be equal to Fund B, with IRR = 9.1%. The reason for this is that the manager of Fund A has less used resources at his disposal compared to the manager of Fund B, which is reflected in their respective CDF. If Fund A has more than 11.26%IRR, it is believed that this fund B.

Now we believe that fund C has the same period in the form of CDF = 100% and Fund B.

A CDF = 100% implies that the amount paid was fully invested over a period of 12 years, in which no interim cash flows, being recovered by the investor at the end of the duration of capital and profit. This will be a case for an investor who bought the same amount of public property and sold it after 12 years. For that, more than 3.55% average growth rate per year will be sufficient to perform better than A and B.

key takeaways

• IRR can mislead: 10% IRR on $ 1 million PE investment can be a yield of only $ 30,000 – not $ 100,000 – because most of the capital was not actually deployed.,
• IRR neglects passive capital, As it really calculates the returns on the capitally deployed capital, and ignores the fate of money uninvited.
• Capital Personogen Factor (CDF) is the major ratio To analyze the impact of PE Fund’s Capital Purniaration Policy and its results on the result of PE investment.
• Great empirical contradiction: Although there is a hypnotic evidence that private property performs better than public property, the real results for PE investors often fail to reflect this superiority due to the impact of passive capital. So, it is not a private property that is a performance concern, but a PE fund in the form of investment vehicles.
• IRR comparison are flawed: Funds with the same IRR but different real benefits are generated for the amount paid in different levels of capital deployment.
• Shares Pme IRR’s blind spot: Like the IRR, the public market counterpart (PME) is not responsible for passive capital.

Institutional investors require full-picture metrics. The main performance measurement indicators do not reflect the real result for the investor, as they neither take into account the initial commitment, nor are they back from the PE Fund waiting calls and cash of cash. Orbital property method (OAM) provides a solution:

• Treats the capital committed as a whole – in which the PE sits outside the fund.
• Display PE investment and performance from both surrounding liquid assets.
• OAM performance figures are comparable to other assets.

Reference

Ludovic Falipou, “The Tyrani of IRR: A Reality Check on Private Market Return”. Enterprising Investor, 8 November 2024, https://blogs.cfainstute.org/investor/2024/11/11/08/The-Tyranny-of-err-a–a- reality-kak-kark-pervat-securens/.

The prescribed form of the upcoming, investment performance (July 2025) in Zewear Pinto, Jerem Spichigar, Mohammad Nadzafi, SSRN.

Javier Pinto, Jerem Spiger, are IRR performance of private equity funds comparable? (November 2024). SSRN: https://ssrn.com/abstract=5025824 or http://dx.doi.org/10.2139/SSRN.5025824.

Xavier Pinto, Jerem Spiger, Orbital Assets Method (2024). Available on SSRN: https://ssrn.com/abstract=5025814 or http://dx.doi.org/10.2139/SSRN.5025814.