Returns on capital of the private equity asset class : an alternative methodology and comparative analysis

Abstract

This paper examines the private equity asset class by presenting an alternative performance measurement methodology and applying this methodology to a sample population of 60 private equity limited partnerships. The limited partnerships comprising the sample population covered the time period of December 1978 through December 1999 and did not include any limited partnerships focusing on early or middle stage venture capital. The sample population's performance was compared to the Standard and Poor's 500 index. Both traditional and the alternative performance measurement methodologies were used in examining the sample population and the comparative asset class, the S&P 500. These performance measurement methodologies indicated that a significant amount of the 60 private equity limited partnerships were outperformed by the S&P 500 over identical time frames. In addition, there were 16 instances where a traditional performance measurement methodology indicated that a limited partnership outperformed the S&P 500 when the alternative performance measurement methodology indicated the opposite.